Why doesn’t Britney Spears attend university?
This was one of several strange questions posed in my first-year economics textbook. (Now you know why students of economics don’t escape varsity unscathed. In some cases, the damage is so irrevocable that they turn into journalists and still write about the ordeal 15 years later.)
It turns out it is not because she couldn’t stand the thought of improving her vocal range, but because doing so, would mean giving up a very lucrative singing career.
The opportunity cost – the next best alternative she sacrificed by singing – was a university degree.
(I can only hope that my parents – who have gone to great lengths to live frugally so their offspring could go to university – don’t read this article. I can just imagine how over-the-moon they’d be to learn that the one thing their daughter can actually recall from her economics class, is something about an American pop artist. However, in the very likely event that they do read this column – Mom, Dad, I would just like to remind you that the opportunity cost of my university degree was a non-paid gig in an emo band with a total of 10 YouTube hits. At least when my articles only generate 10 hits, the return on investment is at least 12 comments.)
At the risk of not only disappointing my parents, but also infuriating the broader economic fraternity, I want to adapt the concept of opportunity cost slightly for personal finance purposes.
New Year’s resolutions
At the start of a new year, it is quite common to plan ahead and to compile a list of New Year’s resolutions – general and financial.
If one of your resolutions was to start exercising but you haven’t managed to find an unoccupied treadmill yet, don’t fret. The flood of new faces at the gym tend to disappear by the third week of January, although I guess it is possible that they are still there and I just can’t see them from my couch.
Each financial resolution has an opportunity cost, but the choice is not always as clear cut as choosing record deals worth millions of dollars over a university degree.
To evaluate the opportunity cost, start with a comprehensive budget that lists all your income and expenses. Are there prospects to increase your income in 2018? What would you have to sacrifice to do so?
Are there opportunities to lower your expenses? While commentators often recommend cutting down discretionary or variable spending – reducing restaurant visits and spending less on new clothes – you can derive great long-term benefits from buying a reasonably priced, slightly smaller home or vehicle from the outset. These two items in particular – which usually necessitate the payment of fixed amounts over longer periods of time – are like magnets for extra expenses. Buying a bigger, more expensive house in an exclusive suburb will attract higher interest payments, insurance premiums, rates bills and maintenance costs. The same is true for luxury cars.
A friend recently argued that the vast majority of people cannot “afford” to live in a large, luxurious house, to buy expensive cars and to go on overseas holidays every year. For most people, even relatively wealthy ones, managing their finances in a sensible and responsible way will mean that they can only choose one – perhaps two of these if they are fortunate.
While he didn’t mean to suggest it is impossible to live a life where all these things are present, the point he tried to emphasise was that the “opportunity cost” of having all these things would be extremely high, so high that it arguably won’t be worth the sacrifice or added financial stress.
A successful tech businessman previously said that it is almost impossible to be an entrepreneur if you have to finance a high-flying lifestyle – you just cannot afford to take commercial risks if your routine necessitates a six-figure income hitting your bank account each and every month. Running your own business naturally means there will be good times and bad times. It is much easier to navigate the rough patches if there aren’t piles of debt and significant bills that have to be paid each month.
This is true even for salaried individuals. It is interesting that modern society places such a high premium on status and career success in order to earn more money to finance a life of abundance. A life of absence can arguably go much further in creating a healthy and balanced financial position that may still include a “luxury” or two.
A life of absence – the absence of unnecessary debt and other suffocating financial obligations – also translates into greater flexibility. The flexibility to take time off, to attend university – even despite the presence of singing talent – or to take a lower-paying but more meaningful job. It can also create a financial buffer to help navigate tough financial periods – unexpected medical costs or losing your job for example.
The risk with a column like this one – apart from the fact that you might learn more about American pop music or economics than might be considered healthy – is that it could create the impression that debt is the devil, spending ill-advised and that your aim should be living like a pauper while hoarding as much money and assets as you can. That is not the intention.
Rather, it is about truly considering the “opportunity cost” of financial and lifestyle decisions – is the sacrifice truly worth the long-term gain? Is it worthwhile to cash out your pension to pay for an overseas holiday in the long run? Is a bigger house worth the additional debt and interest payments? In some instances, the sacrifices that will have to be made may not even be monetary – it may just be less time with family or higher stress levels.
And yet, although singing was the more appropriate career choice for both Spears and me (only one of us succeeded), the most appropriate financial answer won’t be the same for everyone.
Read more of Commandments of a Cheapskate columns: