Step 1) Make two lists.
On the first list, write down everything you need. On the second list, write down everything you want. Differentiating between a need and a want is a crucial step in bulking up your financial avatar. Hint: Almost everything is a want.
Here’s an example.
- Toilet Paper
- Dog food
- The latest video game console
- A new dress
- Trip to Boise
Step 2) When you go shopping, take only your “Needs” list and buy only those items.
Step 3) Consider the opportunity cost of your “Wants” purchase. Get estimates of whatever it is that you want to buy.
- The latest video game console – $400
- A new dress – varies
- Trip to Boise – $500
Think about what 5-Years-From-Now-You would choose.
Avery spends the $400 on the console.
- Year 1: Brand New Video Game Console ! ! ! 🙂 🙂 This is making me happier than joy itself. Life is now complete.
- Year 2: Meh, it’s not the latest model.
- Year 3: I’ve played it 5 times this entire year.
- Year 4: It’s not even plugged in anymore.
- Year 5: So much dust. I should buy the newest console. That’ll make me happy!
Bernadette decides that she has enough forms of entertainment and takes the $400 and puts it in an investment that makes her 7%.
- Year 1: Hey, I’ve made a lousy $28 on my investment. Maybe I should have bought that video game console…
- Year 2: Huh, now I’m up almost $58.
- Year 3: Wow, $90 in interest and my $400 in principal. That’s enough to buy the newer video game console and still have some money left over.
- Year 4: $124.32 in interest !
- Year 5: $566.26!!!!!!!!!!!!!
The opportunity cost for Avery to buy a video game console today is $566.26 less for five-years-from-now-Avery.
Bernadette is a fan of the Duchess of Cambridge and buys this dress for $700.
- Year 1: I wore the dress for 2 fancy occasions. I got so many compliments. You wouldn’t believe.
- Year 2: I wore it twice more. It’s probably my favorite dress.
- Year 3: There are too many pictures of me on Facebook in it.
- Year 4: I could probably sell it on eBay for a couple hundred bucks. It’s a famous dress.
- Year 5: It sits in my closet looking pretty.
Avery likes vintage and finds a dress at the thrift store for $20. She takes $680 and invests it, making 7% interest.
- Year 1: $727.60. I could buy the Duchess’ dress AND another thrift store dress.
- Year 2: I’ve worn my dress about 12 times already in the past couple of years.
- Year 3: $153.03 in just interest !
- Year 4: I still wear the dress occasionally.
- Year 5: Dress has been donated back to thrift store. $953.74 total for my investment.
The opportunity cost for Bernadette to buy this $700 dress now is $953.74 less for five-years-from-now-Bernadette.
Avery takes a trip to Boise and spends $500.
- Year 1: Fun trip !
- Year 3: “Oh, you are from Boise? I have visited Boise. We shall use this topic to start a conversation at this dinner party.”
- Year 5: Flipping through pics and remembering how fun that was.
Bernadette buys an investment fund yielding 7%.
- Year 1: What the heck is in Boise?
- Year 3: $613 ! Wooooooooot!
- Year 5: $701. I’m rich!
The opportunity cost for Avery to take a $500 trip to Boise now is $701 less for five-years-from-now-Avery.
The charts go through 20 years because I personally always think of what 20-years-from-now-thriftygal would want. Plus, the numbers get so much more impressive the farther out in time you go.
None of this is to say that you should never buy anything and live in a cardboard box, but pick and choose your wants depending on what makes you happiest. Maybe that video game console is worth $400 because you’ll be spending hundreds of hours playing with it. Maybe expensive clothes makes you happiest. Maybe, like me, travel is your passion.
Understand what you’re giving up and realize that the more “wants” you indulge in, the poorer you will be because spending your money on depreciating assets will never make you rich.