Would you rather be a bear or hippo?
Which superpower would you rather have: Flight or Invisibility?
Now let’s try a money question:
Would you rather pay $900 a month for 5 years to drive a BMW now or instead wait 5 years while saving $800 a month in a 2% interest-bearing account to buy that same car?
Before we answer that question, let’s weigh the options. Paying $900 a month means we don’t have to wait on the car purchase, so if we need a car right away, that would likely be our selection. However, we are paying $6,000 more (or 60 months x $100 / month), which could have gone to savings or spending money. Investing $100 a month at 7% interest over 30 years would give us an extra $113k. Perhaps we throw a third option to the mix: Buy a $25,000 car instead of a $50,000 car?
By choosing the $900 a month route, we are essentially rejecting the possibility for greater wealth in the future. By choosing the $800 a month route, we are rejecting the immediate timeframe for owning a car. The price we pay for the choices we reject is known as opportunity cost. Every path we don’t choose has a cost associated with it. And while everyone has different answers, the key is to pick a choice that aligns with our needs and our vision for the future. Opportunity cost is just a big game of “Would You Rather?”
Whenever you make big financial decisions, instead of phrasing it: “Should I do this,” maybe try ” Would I rather do (this) or (that)?” This allows you to explore the alternatives. If you’re buying a place, would you rather buy a $350k condo now or save to buy a $500k house later? If you are paying down credit card debt, would you rather pay $200 above minimum or set aside some of that money, like $100, for an emergency fund? If you are saving money, would you rather keep it as cash or invest in bonds / stocks?
How do you go about making the right choice? The best way is to plan ahead. Plot out your future goals, and then calculate what you need to do to reach your target. If you have a complex situation that requires professional advice, look to the help of a financial planner or coach. October just so happens to be National Financial Planning Month in the United States, so what better time to start planning!
Homework: What are some financial decisions you need to make? Test each decision by asking “Would You Rather?” Are there any decisions worth changing?