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Thursday, April 24, 2014

When Opportunity Cost Goes out the Window

Posted by Dave on December 3, 2013

Having what I would classify as a fairly aggressive retirement plan, much of my money is focused to achieving this goal. I would say that most of the time I weigh the opportunity cost of making a purchase against either the time it took me to make that money, or what else I could use this finite resource on.

This kind of overthinking on any kind of purchase decision drives my wife completely nuts. When we first got together, I would start talking about a purchase, research it for a week or so, get excited about it, explain the benefits to my life that this new thing would make…then promptly decide I didn’t really need it anymore. The over-analyzing (I think) has helped me avoid becoming a hoarder, because I, like most people, enjoy a good deal on stuff. Things like useless kitchen gadgets or appliances would be stacked up like cord-wood in my kitchen if I had bought every “cool” thing that I’ve had my eye on (although I still ended up with a graveyard of stuff that I feel bad throwing out once in a while).

Next week, my wife and I are going on a very non-retirement-friendly trip to Mexico. Besides the money being spent, the volume of food and drinks I will more than likely consume while away is probably double what I would normally partake in. Couple the trip with the Christmas parties I have been taking part in, and plan to attend when I get back, and I’m going to be until the end of January before I fit into my pants.

These kind of large expenditures allow my wife and I to better prioritize our finances. I think that having a “side” goal that is relatively inexpensive (and results in a considerable amount of short-term fun) allows for a lot more buy-in for both of us. We have this extensively planned long-term goal of retiring in about a decade, but there are things that my wife and I enjoy doing (trips are more of my wife’s thing) that make the long-term goal more feasible to get to.

Part of the reason that we decided on a retirement age of 45, compared to say 40, was that after reviewing the savings rate necessary to retire at 40, we could see that there would be very little flexibility in our spending – it would essentially result us in being 100% focused on retirement and forgetting about any trips, or large (probably unnecessary) purchases. The 5-year buffer was built in on purpose in order match our priorities.

How do you decide your “fun” expenditures if you’re saving for early retirement? Do you focus entirely on your retirement goals, or do you mix in some of these larger expenditures?

Comments

5 Responses to “When Opportunity Cost Goes out the Window”
  1. I loosely/casually aim for a certain goal ($1 million saved by me, $1 million saved by BF, an apartment completely paid for), and however long it actually takes for me to get there, is another story.

    I don’t pass up opportunities to travel and do not regret taking off about the past 3-4 years in total to travel the world instead of working.

    Especially now that I know I will not be able to travel for the next 5 years or so on vacation with kids on the way, I’m glad I did it.

    For me, there’s always plenty of time to work AND to enjoy yourself, it’s a question of pacing all of that rather than rushing to the end zone.

  2. Elizabeth says:

    I have a remarkable amount of fun without spending money that I am rarely faced with the should I have fun or save question. Basically I put a little bit aside each month and the rest of my fun money comes from gifts. This might change when I get out of school (doing a Masters and working almost full time keeps you busy and out of trouble) but I’ll cross that bridge when I get to it.

  3. diya says:

    I am planing to retire early and saving money to make it happen. However, I am not keep me away from any opportunity that would allow me to travel and have some fun.

    One thing I always believe is that live life in present as you can do it now rather than saving everything for future which we can plan but have no guarantee.

  4. Geoff says:

    What did some wag say:

    “Early bed and early to rise makes one healthy, wealthy and dead inside.”

  5. greg says:

    “we decided on a retirement age of 45, compared to say 40, was that after reviewing the savings rate necessary to retire at 40, we could see that there would be very little flexibility in our spending”

    I personally don’t need much flexibility at all, but others do. It seems like many actually have the main issue in finding a balance with a significant other or spouse. Me, too. Thanks to economic calculation and a great personality on the other side, I can point out exactly how much things are costing me above my isolated baseline =P

    “Early bed and early to rise makes one healthy, wealthy and dead inside.”

    When I hear things like this, they turn out to be some obscenely sour grapes. Final-year students griping about a required thesis? Just get it done early. Putting my money where my mouth when others poked fun at not going to a movie turned sour pretty fast when I was done months early.

    I also get up early, and on the contrary I think 50 years of financial freedom is quite the opposite of dead inside! But then again, that’s based on my values of working on what I want rather than feeling like I need to work; I value freedom of choice more than consumption, and not everybody is the same.

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