Posted by Dave on February 14, 2012
This is a guest post by Dave, who is also looking to retire no later than 45, but unlike Tim has no kids and doesn’t want any. Dave is from Ontario and is working towards his CGA certification.
One thing that enters significantly into any decision that involves money is opportunity cost. Opportunity cost is defined as “the cost of any activity measured in terms of the value of the next best alternative foregone (that is not chosen)”. A recent example of opportunity cost in my own life could be spending fifty bucks gambling on the Super Bowl rather than buying a decent bottle of scotch (or something considerably less fun, like 1 share of Bank of Nova Scotia, which right now is yielding around 4%).
Extending opportunity cost to retirement, I could plan for a conventional retirement – which would allow me to stop working at age 65, have a “normal life” – spending basically everything I earn and living off my company pension until 81 years old (average life expectancy of a Canadian male in 2009). I have chosen a different path, I am essentially buying free time, by saving 75% of my paycheque and living off of the savings from age 45 until 81 years of age.
Ideally, I would like to not work right now – but that isn’t possible because my wife has no interest in living like a hobo somewhere, and I am somewhat attached to her, so we have around 13 years left until we retire. Essentially what I’m doing is buying 20 years by changing my lifestyle around. I could possibly have a bigger house, a nicer car, go on more trips or do whatever I wanted to in those 20 years – but I would have to keep working this entire time.
Personally, I would rather have the 20 years where I can do whatever I want to do. I would rather curb my consumerism significantly and gain financial freedom at an early age. I think that this is what differentiates me from most of my peer group – first of all because I don’t want to work forever, and secondly because I look at the vast majority of my purchases according to how much this will help or hurt my chances of early retirement.
When it comes down to it, spending decisions, whether it’s time or money is based depend on what you value the most. Maybe you have a super-expensive hobby to fund or a large family and value these kind of experiences more than you do financial freedom, or maybe your job is the best thing ever and you don’t mind the tradeoff as much as I do.
Everyone’s situation is different, which is why people’s money decisions are so interesting to look at, because whether the person has made a decision explicitly or otherwise there is always a tradeoff.
Do you think about these kind of decisions? Do you weigh the alternatives for a lot of your spending or saving decisions?