So called financial gurus tell you that if you want to be rich, quit eating avocado toast and drinking Starbucks. Admittedly, this does remove expenses that may add up over time. However, that frugality alone won’t make you “rich.”
Rather, understanding the ideas behind the “avoid paying $10 for avocado toast and $5 for coffee” is what will make you handle your money better and become wealthy. So, yes, you can splurge on your luxuries and still gain wealth.
When you are earning money and spending money, it is important to understand the economic concept of opportunity cost.
Opportunity Cost – the loss of potential gain from other alternatives when one alternative is chosen.New Oxford American Dictionary
Put simply – that breakfast costs you $15 in actual cost and more in opportunity cost. If you chose to invest that $15 instead, your money would generate you additional income. So the cost of that breakfast turns out to be $15 plus additional income from that money.
Alternatively, if you have debt, you could put that $15 towards the principal on your debt and lower your monthly payment or pay off your debt early, either option lowers the amount of interest you pay significantly.j
Now, I am not guilting you out of your fancy coffee. You need to have things in your life that you enjoy. However, it is important to understand the true cost of your purchases. One breakfast will not make you rich. However, viewing all of your purchases in terms of opportunity cost will help you prioritize your spending.
More important than your daily coffee, view your large purchases in terms of opportunity cost, such as buying a car. When you are deciding what car you want and how much you can afford, remember that upgrading to the deluxe package does not just cost you the sticker price and the interest on the loan. That upgrade also costs you the opportunity to use that money elsewhere.
Putting your money to work for you on the best opportunities is what allows you to gain wealth over time. Splurging on luxuries all the time will keep you from accumulating wealth.
What are your thoughts on opportunity cost?