Imagine you’re driving to work and realize you completely forgot your 20¢ iced coffee at home. I guess you gotta snag a quick cup of joe from the Starbucks on your way.
As you creep forward in the drive thru, you notice the price for a cup of their signature Pike Place is now $34. Oh geez, to caffeinate or no?
Opportunity cost is defined as “the loss of potential gain from other alternatives when one alternative is chosen.”
In plain terms? Each opportunity you take means that another opportunity can’t be taken. Having said that, let’s go back to you in your car, sitting in the drive thru.
Would you purchase this $34 coffee?
It seems like a ridiculous question because it is. $34 is a stupid amount of money for a single cup of coffee, even for Starbucks. But that is effectively the opportunity cost of purchasing a $3 coffee today.
If you take that $3 and were to invest it at a 6% rate of return over 40 years, you’d have $34 more in retirement than if you bought that $3 coffee right now. If you buy one $3 coffee on every one of the 250 days you go to work during the year (well, during a normal, non-Corona year), that could turn into $8250 in retirement under the same situation. And that is from a single year of buying coffee every day on the way to work.
“Caleb, why do you have to ruin my morning ritual of coffee, man?”
Let me be clear.
I want you to enjoy a coffee if you want to buy one. But even more, I want you to understand the opportunity cost of purchasing a coffee, or an app, or a playstation 5 or even a gallon of chocolate milk (even though the chocolate milk is probably the best purchase of those options).
Go ahead, purchase coffee or whatever, but do it while using a budget. The budget will control the amount you spend in one category. That’s why Bailey and I spend any amount of money on fun things like restaurants or coffee or Go-Kart racing at Go Pro Motorplex in North Carolina. We pay for things intentionally, because we save and invest intentionally. And we want to have some fun while we’re at it!
But we understand the opportunity cost.
This principal applies to literally anything you purchase. Everything bought has its own opportunity cost. I just used coffee because people drink it every day (me included).
This isn’t to say Starbucks or any other coffee shop is bad. I enjoy a good Starbucks coffee. And there’s certainly nothing wrong with it if you’ve got a designated fund for making such coffee purchases in your budget. The key is just understanding that any purchase, coffee or otherwise, will cost your future more than you might expect.
How about you? What frequent purchase could you reduce or cut out to improve your future financial situation?
Ours is probably being more careful with what we purchase at the grocery store. Recently, we’ve gone over in our groceries for a few months in a row.
I want to hear from you in the comments below!
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