Most people don’t understand the concept of opportunity cost. In basic terms, opportunity cost can be summed up by saying,”If I’m doing X, then I’m not doing Y.”
2 months before my 24th birthday, I landed a sales job with a globally known company. I got a nice bump in pay and a few other perks I wasn’t used to at the time.
At the same time, I was starting to have problems with the 2002 Ford Focus I was driving. The car needed repairs, and I had already put quite a bit of money into reparing other parts.
For perspective, my new role required me to drive 1 hour each way to my sales territory, and spend time visiting customers once I arrived. Although my Focus was paid for, I couldn’t help but feel as if it were time to upgrade to a newer car.
I started shopping around and fell in love with the 2013 Chevy Malibu in Atlantis Blue. From the moment I saw it, I knew I had to have this car.
I sold my car, went to the dealership, and bought the car I had picked out a few days prior. It was fresh off the truck, still wrapped in plastic, and as beautiful as I had imagined in person.
I thought I’d gotten a great deal, but this turned out to be the worst financial mistake of my life. Why? Opportunity cost.
As I said earlier, opportunity cost means, “If I’m doing x, then I’m not doing y.”
You can’t invest the same $500 per month that you’re using to buy a car. Had I, instead of making the payments, invested the total cost of the car, I would have a total nest egg of $1,013,593 waiting on me in retirement.
The moment I discovered this, my car instantly became less attractive to me.
Now don’t misunderstand what I’m saying here. The goal isn’t to never have nice things. The goal is to be conscious of the decisions we make, and the financial consequences of those decisions.
See, that math was for only 1 new car, but most Americans buy new car after new car after new car throughout their lives and wonder why their retirement savings is nonexistent or inadequate.
It’s time to take back control of our financial lives. Don’t let feelings of inadequacy and/or impatience drive you to make decisions you’ll later regret.
Truthfully speaking, nobody cares what you drive after the newness of the purchase wears off. You’ll most likely spend more time in bed over the course of a single year than you’ll spend in a car over the course of the 5 years you’re making the payments.
Now ask yourself if that’s worth having to depend on the government to take care of you in retirement? I would hope not!
So what’s the recommendation? Build a budget, save up, and pay cash for your cars. Doing this will free up money to invest, and, soon enough, you’ll get to a point where your cars won’t cost you a dime.
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