The Opportunity Cost Fallacy

I have written before about how the financial independence community can be somewhat close minded. This is no more apparent than when discussing luxury spending. Post in a local forum or on Facebook about a big purchase, and the dissenting opinions come quickly. Over and over again, the claim is that by spending on these big-ticket items, we lose out on the opportunity cost. Whenever I talk about stealth wealth fails, I always get this argument tossed back at me with a great deal of vehemence. Yet, I believe these arguments are spurious. Many fall prey to the opportunity cost fallacy.

The definition of opportunity cost per Investopedia:

Opportunity cost is the cost of choosing one alternative over another and missing the benefit offered by the forgone opportunity, investing or otherwise. Opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action. Stated differently, an opportunity cost represents an alternative given up when a decision is made. This cost is, therefore, most relevant for two mutually exclusive events. In investing, it is the difference in return between a chosen investment and one that is necessarily passed up.

Real World Example

In reality, the conversation looks something like this:

Post on Facebook:

Me: Hey guys, I bought a new Tesla (Picture of me waving with a brand new car).

Naysayer: Such a waste of money!

Me: Why? I love the car!

Naysayer: Opportunity costs, dummy. If you took that same 80K and instead of buying a car, invested in VTSAX, you would have a billion dollars in twenty years (Ok, a little exaggerated).

Me: Damn, why did I buy the car! I could have been a billionaire.

And this all makes perfect sense if you ignore the opportunity cost fallacy.

What, you ask, is the opportunity cost fallacy?

In short, it’s mistaking the value of money (compounded or not) above that which you have traded it for (car, vacation, insert whatever luxury here).

Let’s dive a little deeper.

The Cost of Experience

A repeated theme in the opportunity cost fallacy is that we lose the opportunity to let our money grow and compound. In my humble opinion, however, it is short-sighted to believe that the trade off is always worthwhile. For instance, certain experiences occur only once in a life time and are well worth spending on.

At the beginning of our careers, my sister and her husband moved to Australia for a year for a temporary job relocation. Burdened by our busy careers and leftover college debt, my wife and I decided to forego the costly trip and save instead.

Years later, I have huge regrets about not taking the trip. Of course, the thousands of dollars that we didn’t spend may be tens of thousands of dollars now. But I will never have a chance again to go stay with my sister and see the awe and beauty of their temporary home.

Certainly I can afford to go now, but I can never go back and rewrite myself into their youthful adventure.

The Value of Things

You know what’s really exciting about FIRE and fatFIRE. You have enough money. Technically, once your investments and side hustles cover your yearly expenses, everything left over is just gravy. So there comes a point when spending a few thousand here or there (or a few hundred thousand if you’re lucky) just doesn’t move the needle.

As many have said before, it serves no one to be the richest couple in the graveyard. Herein lies the crux of the opportunity cost fallacy.

On the other hand, that beautiful painting that hangs in your room, or that speedy car in your driveway, may actually move the needle quite a bit. It may give you pleasure for years or even decades.

The Future Is Not Assured

While it is financially responsible to plan for the future and cover a hopefully long and healthy retirement, the opposite is also very possible. Sadly, people sometimes die young.

It would be very sad to die at a young age after spurning the pleasures of material wealth and foregoing the joys that money can buy.

No one knows when your time is up. It is OK to spend money, to live a little.

In Conclusion

Don’t fall victim to the opportunity cost fallacy. Every dollar earmarked for spending could, in theory, compound and bring you more wealth. Yet, as human beings, we need to eat, breath, and shelter.

We also need to covet, and adventure, and experience the best money can buy. Sometimes.

There is no shame in trading wealth for enjoyment and memories.

Money was meant to be spent.