Money Listens

No doubt about it, except for your home and car, an elephant is the largest purchase you can make. We’re talking big money here. Anytime you contemplate making a major purchase you should consider the opportunity cost of your money. The opportunity cost is the loss of some other thing you could have had with that money.

We make decisions everyday involving opportunity cost. It doesn’t apply only to elephants. Anytime we sacrifice one activity in favor of another, we lose the benefit of one. On Saturday morning you can work out in the gym, or go visit a friend. Both are good choices, but you can only choose one. You lose the opportunity to do the other.

Same with our money. If you chose to buy something, you won’t have that money available any more. Before you make a major purchase, you should consider what else you could do with that money. Would something else be more beneficial to you? You’ve really wanted an elephant, but would that money be better used in your retirement fund? Or, you could put in a hot tub and go on a nice vacation. It’s a trade-off. We have a limited amount of money and must chose how we spend it.

An overall financial plan helps you evaluate opportunity costs. Let’s say you’ve paid off your credit cards, have an emergency fund, and are saving 15% for retirement. The next item on your plan, your next goal, is to save for your kids college. How important is an elephant vs. a college fund?

It’s a trade-off, but it’s your choice. There’s no right or wrong answer, but don’t fool yourself; consider what you’re giving up by buying that elephant.

This entry (Permalink) was posted on Tuesday, April 22nd, 2008 at 4:00 am and is filed under A to Z, Dave Says. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response , or trackback from your own site.