There is definitely a lot more to say about opportunity cost. For instance that it is one of the base concepts for financial independence. Let me explain:
Opportunity cost is defined by Investopedia as "a benefit that a person could have received, but gave up, to take another course of action." In the example I gave in the video where you got offered a job, the opportunity cost of not taking the job was $5,000 a year. Nice, clean, and to the point. However, opportunity cost does not have to be about money, and in fact I argue that it is most important to expand the assessment of a decision's cost to be qualitative as well.
Humans have a need for belonging, and a simultaneous desire to one day reach a state of relative actualization. People want to be happy, maybe retire, travel, or whatever else floats their boat. To achieve this future we must keep the quantitative opportunity cost of a decision in mind, but also the qualitative cost so we can remain happy and productive individuals. The most challenging part for many people is that spending money is a way to feel like they belong socially. Nobody wants to be a pariah.
To illustrate this I'll use getting a new car to replace an older one as an example. So according to Bankrate the average payment for a new vehicle is $479.
Which, real quick: Holy crap. For that much I could get Chipotle every day for a month... and bring a friend a few of those days. Every month.
Anyway, the focus then is on how much that $479 a month car will buy. Since we are assuming there was already a working vehicle the buy is about status. Unfortunately unless the car is that impressive the lasting impression on others will be nil. We tend to use ourselves as a reference point for the perceptions (judgement) of others, but frankly other people don't care that much about you. They are focused on their own lives and what other people think of them. If it was your new car people would presumably be impressed! But then they will quickly forget it. Just like whatever thoughts they have on the car you happen to be driving currently. They have better things to think about. And so do you.
To be financially stable then we need to focus on the future. To focus on the opportunity cost of picking the easier, immediate, and more exciting option in front of us. Letting go of that desire is hard, but worse is living paycheck to paycheck like 78% of Americans. If you're living paycheck to paycheck then there's work to be done. It's not fun. But ultimately choosing the future where you have better finances results in a happier, less stressed you.
Personally, when it comes to turning down things I don't really need I have a technique. Imagine a person who has a less than impressive car/wardrobe/house, etc. And despite that they manage to pull it the fuck off. Now imagine it's you who you are looking at. Pulling. It. Off. Doing this in day to day life feels a bit weird. My advice? Own it regardless, it'll make you badass. Until then, fake it till you make it, baby!
Lastly some math. Below are some fancy numbers and stuff. I got them all using a compound interest calculator here.
If you were to save $479 every month you'd have stashed away:
$5,748 after a year, and $57,480 after 10.
If instead you invested that and got the average, inflation adjusted return of 7%?
$83,391.25 in 10 years.
Heck, even at a conservative 5% growth rate you'd have over $81,000 in 10 years... I'll take my free $30,000+ and be on my way, thanks.
What makes you happy is what's important. Specifically what makes you lastingly happy is what's important. A new car is all well and good, but in the end will it just end up being a vehicle to ferry you to a job? A job you have to have to go to because you still owe money on the car. You need the car for your job, and you need the job for the car. Nothing against a good job, but do you want to have to go every day to keep my life from collapsing. I get more lasting joy out of knowing I have the freedom to do what I want.
And, no, I don't stress out too much about going out to Chipotle once in awhile. Neither should you.
Who am I?
My name is Russell Swinton, and recently I began this site to share my thoughts on Financial Independence (FI) and to educate folks new to FI on how to do it. I'm here to create short videos about the topic that are detailed, yet approachable.