Investing

How Your Opportunity Costs Shrink Over Time

By 
Opher Ganel, Ph.D.
Opher Ganel is an accomplished scientist (particle physics), instrument designer, systems engineer, instrument manager, and professional writer with over 30 years of experience in cutting-edge science and technology in collider experiments, sub-orbital projects, and satellite projects.

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Especially if you follow various bloggers in the Financial Independence, Retire Early (FIRE) movement, you know that a dollar spent now isn’t just a dollar.

It’s also all the dollars that spent dollar would have brought in had you invested it instead.

If you read my article, Pro Tips for Reaching Early Financial Independence, you realize that this dollar you just spent also risks getting used to spending another dollar like it tomorrow, and the day after, and the day after that… What’s known as “lifestyle inflation.”

The Opportunity Cost of a Dollar Spent

Let’s agree at the outset that certain fixed expenses can’t easily be changed.

Let’s also agree that you may not want to accept the lifestyle implications of changing e.g. your rent or mortgage payments, auto loan payments, utility bills, etc.

However, I’m sure you’ll agree that over the past month, you’ve spent quite a few dollars on things you wanted, but didn’t really need.

I know I have.

If you have 38 years ahead of you before retirement, a dollar invested now will probably be worth about $6 when you’re ready to call it a career, after accounting for inflation.

If you keep adding just one more dollar each year, those will grow to more than $100 in 38 years.

If instead of one dollar, you divert $1000 each year from spending to investing, your portfolio will likely be more than $100,000 richer.

In How Soon Can You Reach Your Personal FIRE Point, I present a table that helps you figure out the real long-term opportunity cost of spending those extra dollars vs. investing them.

For example, if you currently save 20% of your income and plan to live in retirement on 80% of your income (after accounting for inflation), the table shows you need almost 38 years to reach financial independence (FI).

Shift 5% of income from spending to savings, and you’d reach FI about 52 months earlier. If your annual income is $60,000, that means you’d need to reduce your monthly spending by $250 and invest it instead. That’s about $8/day.

Spending an extra weekly dollar costs you about an extra month of work before you can retire.

Spending an extra daily dollar adds over 6 months to your work life.

Your Opportunity Cost Shrinks Over Time

The thing is, the above is true if you’re at the start of your work life.

You still have decades ahead of you for every invested dollar to compound, and for every dollar of lifestyle inflation to bite your wallet and your portfolio.

However, if you’re only 5 years from retirement, you’re almost out of time for compounding to help.

The flip side of that is that the opportunity cost of an extra dollar spent is that much less. In this scenario, a dollar invested now might be worth .30 in 5 years (after inflation). Investing an extra dollar each year until retirement would add just over $5.60 to your portfolio.

Make that $1000 a year instead of $1, and your portfolio would grow by just $5600. That’s barely more than the $5000 it would add if you put it into a savings account where interest is about the same as inflation.

The Bottom Line – What This Means to You

As a financial strategist, I’d never encourage anyone to waste money.

I’d also be careful of suggesting you shouldn’t try to set aside and invest as much as you reasonably can most of the time.

However, what all this means to you is that if you have decades before you may reach FI, now is exactly the time to err on the side of being more frugal rather than less.

When you’re older, you’re closer to retirement, probably making a good deal more money, and maybe past most of your major spending (e.g., down-payment on a first home, raising kids, sending those kids to college, etc.).

At that point, the opportunity cost of an extra dollar spent is much lower, so you can err a bit more on the side of spending some more to experience more fun things, even at the cost of investing less than you could if you stayed very frugal.

After all, as my grandmother would say, “Ever since they invented death, nobody is safe in this life.” Nobody promises us that we’ll actually live to retire, so make sure to enjoy at least some of your hard-earned cash today. Balance your future self’s needs and wants with those of your current self.

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.

Opher Ganel

About the Author

Opher Ganel, Ph.D.

My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals. Connect with me on my own site: OpherGanel.com and/or follow my Medium publication: medium.com/financial-strategy/.


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To make Wealthtender free for readers, we earn money from advertisers, including financial professionals and firms that pay to be featured. This creates a conflict of interest when we favor their promotion over others. Read our editorial policy and terms of service to learn more. Wealthtender is not a client of these financial services providers.
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