The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Kalergie on July 21, 2015, 01:23:21 PM
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Imagine you are on the fence between A) buying an item you like but don't really need it and B) not buying said item at all. And you wonder, if you invested the difference, how much would the savings be worth over time?
Or imagine you have a choice between two items with different prices and want to evaluate how much the more expensive item will really cost you in the long run if you invested the difference.
I am talking about opportunity cost.
The higher your opportunity cost, the harder it is for you personally to buy stuff as you know how much the purchase will hurt you later on. This would also be used for comparing buying vs. renting real estate decisions....
MMM uses 7% I believe, since it is the inflation adjusted historic return of the stock market. That's a great start but fellow Mustachians might think differently about it. Do you use the MMM rate when evaluating your opportunity cost or do you use a more or less aggressive rate?
Personally, I use 5-6% but would love if you guys could share yours.
Thanks!
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I just use 7%, but I don't buy much, so I calculate opportunity costs to judge other peoples choices.
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If I'm on the fence I just don't buy the item in question. The few things I do buy are so low cost that its not worth worrying about opportunity cost. So 0%, you egghead!
Love the categories btw.
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The cost is not having that thing, versus having the money. The tiny percent you'd earn is pretty insignificant compared to the 100% cost of the item. 0% is close enough for me. Buy when it's worth it, skip when it's not. Save everything else.
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I don't do it much anymore, but in the early days, I always told myself that a purchase "cost" me 33x the price, as that was what I calculated how many times it would compound between then and retirement (I think I was using 50 as a retirement age back then).
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i dont quite understand the point of this. if you are buying things at 5-6% but 7% makes you not want to ... you're probably buying crap you dont need.
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If I'm on the fence I just don't buy the item in question. The few things I do buy are so low cost that its not worth worrying about opportunity cost. So 0%, you egghead!
Love the categories btw.
Yep, agree. If I make a big purchase, I think about it for awhile, explore my options, explore why I want (or "need") it, and then decide. If I am undecided for too long I just don't buy it. Every time I bought something I was undecided on, I ended up returning it.
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I only apply it to:
1. Something I can do myself versus outsource. I consider my after tax hourly pay when doing it. An example would be fixing a flat on my bike myself versus having the shop do it.
2. Bringing food to work/eating in versus getting takeout. The answer is always the same.
For actual items for purchase, I just ask myself "need or want". I wait at least a few days (sometimes as much as a year) to ponder how much I will use it and how it fits into my budget.
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Thanks for the responses. I was looking for a quantitative number but got something much better. "If I'm on the fence, I don't buy it. If I believe the item is worth buying, there is no opportunity cost." :)
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The opportunity cost I really care about is time because I can't make more.
It's also the one that seems to be ignored a lot when comparing different alternatives...including the time it takes to compare the alternatives.