The Price for Immediate Gratification

      For some, there’s a great deal of pressure to Keep up with the Jones’s. And who’s to blame them. We are bombarded everyday with the “got to have it” and “got to have it now” mentality. People are compelled to immediately have what they want because it somehow proves to our peers and ourselves that we are successful in some way. It also doesn’t help when lenders pass on credit like candy (vacation loan anybody?). We are encouraged to use our home equity as a piggybank and the average household credit card balance is close to $10K.

But immediate gratification comes at a price. And many people would think twice if they really knew what it was costing them over the long-term. This is what I call personal opportunity cost. Opportunity cost is the value of a decision if you opted instead to restrain yourself from that purchase or only purchased what you needed rather than what you wanted.

For example, say you wanted to purchase a luxury automobile that is $20K more than a vehicle that meets your needs. What if you decided not to purchase the luxury vehicle; instead investing the money, earning 7% annually after taxes? That decision thirty years later would create $152K in value. This equates to $63K in today’s dollars if inflation maintains its historical rate of 3%.

The money within itself is not important. What’s important is what it can provide thirty years down the road. This amount can cover cash flow for well over a year of your future retirement needs. That’s what’s important here.

Let’s take this a step further. Let’s say that not only you wanted that luxury vehicle, but you wanted to buy a new vehicle every 3 years even if the vehicle isn’t past its useful life. The opportunity cost of this over fifteen years and six auto purchases later using the same return rates and inflation would be almost $163K in today’s dollars. At current inflation rates, this could cover three years of a Harvard education, or a year and a half of long-term care, or provide a sizable down payment on the vacation home you always dreamt of.

This is a simple illustration and you can certainly play with the numbers in your own way; the bottom line is that no matter what you assume, there is a cost in some shape or form. You can do this with any type of purchase. I picked the auto purchase because this is an item where individuals can significantly overspend over time. I didn’t even go into the opportunity cost of a less fuel efficient car or financing. Also, no one has ever told me that buying a luxury auto is high on their lifetime goal priority list.

Before you consider buying a large ticket item that may be more luxury than necessity, do these three things:
1.) Determine the dollar value of the “luxury” element of the purchase.
2.) Determine the future and present value of what that cost would be if you opted to save it rather than spend it. This is easy using Microsoft Excel or a financial calculator.
3.) Determine what this amount of money could do in terms of achieving your important lifetime goals such as paying for your children’s college, living an independent and dignified retirement, or leaving a legacy to your kids or charity.

I’m not against living for the day. Life’s too short. If you have your ducks in a row and are already doing what you need to do to accomplish the most meaningful things you want out of life – go for it. But by determining your opportunity cost before acting, you will be able to differentiate if this will provide real meaning in your life or is just an act of accumulating stuff.