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!