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Commandments of a Cheapskate 8

Britney Spears, opportunity cost and the advantage of absence.

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: 

A salary-earner’s pursuit of financial health

Rethink your approach to car buying

The big decision: What to do with your fortune

How to flee from financial FOMO

An expensive lesson in mobile downgrading

Do you know the price of milk?

A run for my money

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Funny and entertaining read Ingé. Never seen the very apt description “A life of absence”. This is exactly how I try to life my life, as having been through a few redundancies in the past I now value the flexibility that comes with having a strong financial buffer above almost all else. The challenge however is to strike a healthy balance between saving and planning for the future and living in the moment. Life can be short (which I was reminded of again this year with a friend in his mid 40s passing away).

I have noted over the years that I am becoming more and more of a miser. 15 years ago I would spend around 5% of my net worth when buying cars (always 2nd hand). Am now looking at upgrading and struggling to even commit 0.5% of my net worth on a car (even though my net worth is now around 8x higher). As you get older you come to appreciate that a big fancy house adds little true value to your life. It is the simple things that matter – family, friends and making a positive impact in this world (now matter how small).

My resolution for 2018 is to live a little and to not be so obsessed with saving every last cent.

Such a nice comment Ryan.

For 10 years I used my entire annual bonus to reduce the bond and car debt and save for my children’s education. Even though I never enjoyed the bonus, through purchasing things (and I myself wondered if I should not rather “Live a little”) I am now so grateful that I did.

I have less financial stress, and a degree of flexibility.

And although I still have a small but comfortable house, and a small but comfortable car we can now afford to go on overseas holidays which adds great value to my life.

CC…the motto found you “…making a living is not the same as making a life”. Congrats

External focus = More is never enough = unhappiness
Internal focus = Gratitude = happiness

I think I’ll have “Hit me Baby one more time!” stuck in my head all day. Oh, for a life of absence.

@Mr Groenewald: Oops I did it again. My apologies 😉

You know what they say about money
That it can’t buy happiness
Continuing living in the life of lux
Life sometimes, I know it sucks

*Lines from “Money, love and happiness” – Britney Spears

There is little correlation between spending money and happiness for me. It is worth deciding for yourself what makes you happy, and removing the barriers that make you unhappy.

For me that would be not going to a job or sitting in traffic – that would give me far more pleasure than sitting in a Maserati on the way to the office – so my spending decisions reflect earlier independence from a job, as opposed to making the 1 hour commute more fun.

You know what they say about money
That it can’t buy happiness
Continuing living in the life of lux
Life sometimes, I know it sucks

*Lines from “Money, love and happiness” – Britney Spears

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