The Hidden What-If Cost

Yesterday, I shared a meal with a friend. He's a young guy who reminds me of how I was around 20. Like me at 20, he loves investing. And, like me at 20, he prefers to do it irresponsibly and overconfidently. Ah, so many similarities between us. Part of me wants to shake him out of it, but then again, I don't think anyone was going to shake me out of my ridiculous ways back when I was his age.

He revealed to me how he's lost a good chunk of change through his investing practices. Not "lost" as in the market is going down but will eventually come back up. Rather, lost as in, poof, it's gone. It's a lot of money to him, but he did have a good comeback for me. "Travis, you always talk about how we shouldn't do things that financially endanger us or our family. This doesn't put me in danger, and I don't have a family yet."

He makes a good point. He may be out thousands of dollars, but he won't go without food or shelter. He's a single guy with limited financial overhead. However, here's where I want to land this plane. I pointed out to him there's a far more significant consequence at play. It's the hidden what-if, commonly known as opportunity cost. Said another way, it's what he could have done with that money instead of what he chose.

Out of respect for him, I won't use his actual numbers. Let's pretend he made some investing choices that cost him $5,000. Or you could insert a different choice here. Maybe you spent it gambling. Perhaps you decided to have a wild night at the club, or that impulsive trip to _______, or pulled the trigger on that motorcycle you've had your eye on.

Sure, $5,000 less in your pocket may not ruin your life. That's a fair point. But the hidden cost? The opportunity cost is what you could have done with this $5,000 instead of losing it on risky investments. In the case of my friend, I used an apples-to-apples comparison. Since he's trying to make money by investing, I shared an alternative scenario. If invested the right way (broad low-cost index funds with a lot of patience), that $5,000 would be worth nearly $250,000 by the time he turns 65. So, correct, his loss didn't ruin his life......but the cost was quite steep.

We can insert other opportunity cost scenarios here, too. How many hurting families could we have helped with $5,000? How many hungry children could we have fed with $5,000? How much education could we have attained with $5,000? How much quicker could we replace our aging car with $5,000? How many amazing memories could we have created with $5,000? The list goes on.

Yes, it's only $5,000. But it's $5,000!!!! Whenever we make decisions, we must look beyond the direct costs. An opportunity cost assessment will show us our best choice. Follow that one!

Opportunity Cost: In the Wild

On the heels of yesterday’s post about opportunity cost, at least 10 people asked if I would provide a real-life example of how the exercise works in practice. At the same time, Cole (Meaning Over Money co-founder) has been encouraging me to be more transparent with my own numbers. I feel like I’m a very transparent person, but being open with my specific numbers does not come naturally. In fact, it’s quite uncomfortable. Therefore, let’s get me out of my comfort zone!

The following is what our prioritized opportunity cost list looks like. As a reminder, this is everything that’s not a basic need in our household (housing, food, transportation, insurance, phones, interest, etc.). The following list is for a specific month, but it also resembles what a “normal” month looks like in this season of life. Our basic needs are fairly modest and we never carry any debt. Excess income is approximately $3,800 this month. With that context in mind, here we go:

1. Giving: $1,000

2. Travel: $800

3. Kids: $600 (this is a mix of needs and wants, but heavy on wants)

4. Sarah's Personal Spending: $250

5. Travis's Personal Spending: $250

6. Dining Out: $150

7. Streaming Services: $150

8. Car Fund: $150

9. Events/Entertainment: $150

10. Home Furnishings: $300

11. Investing: None

12. House Cleaning: None

13. College Funds: None

14. Lake Condo: None

When I pull back the curtain and reveal our list, a few things come to mind.

• The fact giving and travel eats up 47% of our excess income is a true reflection of how important those are in our life. They are the foundation of our family.

• I believe personal spending for each spouse should be a non-negotiable in every marriage. It acts as a great release valve and allows each spouse to live out their unique values and interests with a portion of the finances. Our house rule has always been each of us shall get the same amount…..no matter what.

• For as important as food is to our family, dining out hasn’t received as much love in recent years (initiated by COVID). Something to think about in the months to come.

• I’ve been putting $150/month into the car fund for 19 years. It works wonders!

• Investing and college funds have taken a back seat in this season of life. This is, in part, a consequence of our heavy giving and travel budgets (mission and memories, as my friend Gary Hoag likes to say).

• We stopped getting periodic house cleaning in Fall 2022…..probably something we’ll move up the list in the near future.

• Sarah REALLY wants a small condo on a lake. I mean, she REALLY wants it. This is an ongoing discussion in our household and it wouldn’t surprise me if this one moves up the list in due time.

Wow, that was as uncomfortable as I feared. Oh well, I hope you found it insightful, beneficial, and perhaps a bit entertaining. What’s most important to remember is this is a reflection of OUR values. It’s unique to us because we are the ones who have to live our life. And you get to live yours! As you do, I hope you recklessly and relentlessly live your values!

Through the Lens of Opportunity Cost

Let’s say you want to spend money on something. It could be a number of things. A new car, a fresh wardrobe, private school for your kids, or maybe a trip to Disney. Let’s also say this particular item is important to you. If it’s important to you, it’s important (other people’s opinions don’t count). Let’s assume this purchase is highly important to you.

Where is the money going to come from? No, this isn’t a pay with debt vs. a pay with cash type conversation. Whether you use debt or pay with cash, the question still stands. Where is the money going to come from? There’s no free pass. This is the essence of opportunity cost. Every time we spend one dollar on item A, it’s one less dollar we can spend on items B, C, D, E, etc. Whenever we elect to spend money on something, something else suffers. I’m not saying this through the lens of negativity, but rather a simple reality.

Let’s say you’re planning to save up for a trip to Disney…..call it $8,000. If you really want to spend $8,000 on a trip to Disney, great. But where is the money going to come from? The simple (and recommended) answer is that you’ll set money aside in your sinking fund each month until you have enough. But where is the money going to come from? Maybe you decide to set aside $500/month for the next 16 months. The most important question isn’t whether or not you should do it, but rather what you’ll give up as a consequence. That’s $500 that won’t go somewhere else……so what is that something else?

This question gets to the heart of aligning our values with our behaviors. It forces us to look at each part of our life objectively, prioritize, then act. If you do that in earnest, you may decide not to go to Disney. Or you may immediately decide Disney is important, then discern what to give up in order to make it happen. But there’s a very real cost either way.

Here’s a quick idea of how to execute this:

1. Make a list of all the things in your financial life that are wants (i.e. not your basic needs to survive). This includes items such as dining out, travel, entertainment, extra debt payments, investing, etc.

2. Put a monthly dollar amount next to each of these items.

3. Prioritize them in order of most important to least important.

4. Determine which ones make the cut in your monthly budget this month (i.e. there’s enough money to fund it), and execute accordingly.

5. Repeat this process every so often to ensure you continue to align your values with your behavior.

When you do this, you’ll say yes to your yes’s and no to your no’s. It’s not always easy, but you will most certainly find more contentment and satisfaction when you know you’re pursuing what really matters to you.

"What If I Don't Have $20,000?"

A few days ago, I wrote about a concept I call the “pile of cash test.” In it, I explained how a client of mine used this test to alter their decision from buying a $35,000 car with debt to buying a $20,000 car with cash. I received a lot of feedback from that piece, but a handful of people were quick to ask the question, “what if I don’t have $20,000?” One person was sincere in their question, but several were insinuating it is a dumb idea because debt is the only realistic way to buy a vehicle.

I thought it would be worthwhile to answer the question. If you don’t have $20,000, yes, I’m suggesting you don’t buy a $20,000 car. The point isn’t to figure out the best way to buy a $x vehicle, but rather to figure out what vehicle we can buy with $x of available cash. This idea brings a lot of criticism, I know.

First, I’m not suggesting we buy a pile of junk. Many people do that, to their demise. I’m an advocate for buying a reliable car that will require as little ongoing maintenance work as possible. Yes, a car is going to have issues and require maintenance. But it’s amazing how many people will make $800 monthly payments for 7 years just to avoid the occasional $1,000 repair bill. This is a very common justification for expensive, debt-fueled purchase decisions.

Data shows the average household in America spends $400 per month on vehicle loan payments. But there’s a catch! That’s the average per household…..including all the households with no car payments. I decided to do a little data digging of my own. Of the last 75 families I’ve met with, at the beginning of our coaching relationship they had an average monthly car payment of $320/month. So it was a bit lower than the national average. This is where it gets interesting. 51% of these families had ZERO car debt. Zilch! Wait, it is possible to go without car debt!?!? If you take those families out of the equation, that means the average household monthly car payment for those who had car debt was $650/month! Yikes!

This immediately brings two interesting points to the surface:

1) Many people do choose to live without car debt. Doing so, which often requires sacrifice and humility, opens up so many doors with that excess cash. More than half of the people I meet with have made this possible…..even before starting their coaching relationship with me. I can testify how much freedom and momentum these families have as a result of these decisions.

2) For the people who choose to live with car debt, it’s crushing them! I regularly see $1,000+ payments for single vehicles and households with $1,500+ of combined car payments. This puts a stranglehold on their excess income and prevents them from doing things that truly matter to them.

I think you deserve better than to use your precious resources to constantly fund a car payment. For some of you, true freedom may lie just on the other side of a few sacrificial decisions. I promise you it’s worth it!

Don't Let Your Memory Become a Nightmare

In yesterday’s post, I talked about the idea of investing in memories and not dwelling on the cost. The key point was that memories will last forever, while you soon won’t even remember what you paid for them. Two readers quickly pointed out this perspective seemed a bit negligent. That it’s irresponsible to recklessly pursue memories at the risk of impairing one’s financial life.

I’m really glad they pointed this out to me! I couldn’t agree more. I was perhaps too casual or too presumptuous that people are avoiding self-sabotage in the process. I of all people should know better than to make this assumption. I work with people every day who make decisions that will haunt them for years or decades to come.

Whenever we make a financial decision, it has to fit within the broader context of our life. When I made the choice to fly to Dallas and sit courtside at a Mavs game, contextually I knew I could intentionally budget for it while still finding my balance between needs, wants, giving, and saving. If this opportunity would have presented itself 10-15 years earlier, I don’t think I could have said the same thing. Back then, a similar decision could potentially have knocked me off balance, or incentivized me into debt. When we make those types of choices, we create a scenario for ourselves where our memories turn into nightmares.

Each summer, Sarah makes the case for us to buy a small condo in a popular nearby lake community. She dreams about all the memories we can create there, as well as all the family time we would get to share together. She makes some very good arguments….and it sounds amazing. However, we then have to consider how it fits into the context of our broader life. Unfortunately, choosing to purchase this condo today would have deep negative ripple effects that could quickly turn into a nightmare.

Memories matter, but not when they haunt us for months or years to come. Choose wisely and choose carefully. When you do, those memories will be beautiful….and priceless!