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What Does it REALLY Cost?


 

"Whenever money is added to any decision, it gets more complex."


-Dan Ariely

 

It's hot out. I wipe off my forehead with my shirt. I have a lot of grass left to mow. I'm only nine years old, but my grandpa pays me five dollars, ten if he's feeling generous, to mow his lawn. This is fun for me because I don't have many other ways to get money.


As soon as I'm done mowing, I walk up to him with my palms up like I'm entitled. As soon as I get the money, I run over to the local convenience store to get my hands on some sugar. With five dollars, I have to weigh my options carefully. I can get 9 candy bars, or four bottles of pop (or soda, or soda-pop, or coke, or whatever), or a lot of different variations of dime, nickel, and penny candy. Of course, I can always mix and match. Getting two candy bars means I can get one less pop or ten fewer packs of candy cigarettes. I have to monitor my trade-offs.


It seems as a kid I intuitively understood opportunity cost and trade-offs, although I would never have been able to articulate that. It seems easier when we are young, and life is simpler. When we grow up, opportunity costs and trade-offs still exist, but we often forget that and live our lives without fully appreciating the real cost or value of our purchases.


Money is a tool

Money Is a Tool


People have the tendency to view the accumulation of money as their ultimate goal. This doesn't necessarily have to be workaholics. Some people will save and save and save because they think having big balances gives them status, security, or freedom. But money alone is worthless. It literally has no value by itself. It's only when we use it as a tool, when we exchange it for something we actually want and value, that we derive any value from it.


Opportunity Cost


If you've ever taken an economics class, you've heard of something called opportunity cost. If you haven't taken an economics class, unfortunately, you probably haven't heard of opportunity cost. Opportunity cost simply means that the cost of something goes beyond dollars. Opportunity cost refers to what you have to give up to buy something or earn something. When I was a kid buying a pop, I knew I couldn't also use that money to get two candy bars. It can get more difficult when you start thinking about the opportunity cost of income - for example the opportunity cost of a flexible job whose mission you agree with and doesn't require travel is the salary you could be making at a far more demanding job (meaning, if the crappy job pays $100k, but the fun job pays $75k, then the opportunity cost of the good job is $25k). Fortunately, I'll just be talking about the first kind of opportunity cost in this post.


The stuff we spend our money on, both the things and the experiences, have a couple of levels of cost to consider.


Level 1: The first level is easy. This is what everyone thinks about when we think about money. It's the sticker price. It's on the price tag. If we want something, we have to give up some dollars (or some other currency).


the cost is the dollars you have to give up

Level 2: The second level is more difficult for many of us to understand. We know that we have to give up some dollars to get something, but we rarely consider what else we could have used those dollars for if we chose not to complete our purchase.

the cost is what else you could have used your money for

When I was a kid deciding what kind of sugar to buy, the first level is that a Mountain Dew costs $1. The second level is to recognize that a Mountain Dew costs two Crunch bars.


Let's use a grown-up example. Assume you're thinking about buying a new car. You do your research, and you find a car that will cost $25k. Thinking about the second level of what this costs can help you better decide whether or not you want to make the purchase.


How might that look? One example is that a new car costs you a trip to Spain next year. A new car might cost the same as having a nice dinner out twice per month for a few years. A new car could cost five years of student loan payments and interest, or it could cost two years of work.


Let's put visuals to these options: