Money Rehab with Nicole Lapin - WTF are Opportunity Costs?

Episode Date: March 29, 2022

Understanding opportunity costs can help you make the best financial decision for your future self. Let’s get into it. Here's Nicole's calculator: https://nicolelapin.com/calculator/wealth/ See omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Today is another installment of a classic Money Rehab WTF episode,

where I break down a term for a listener who wants to know, what the fuck does this mean? Here's Katie with today's question. Hey, Nicole. My name's Katie and I'm a hotel manager in Palm Springs. My lease is going to be up soon and I'm thinking of renewing, but I've just been looking around at other places just for fun. And when I've asked coworkers for advice,

one term I've heard a few times is opportunity costs. I don't want to embarrass myself around my coworkers, but I have no idea what they're talking about. Can you tell me what are opportunity costs. I don't want to embarrass myself around my coworkers, but I have no idea what they're talking about. Can you tell me what are opportunity costs? You have come to the right place, Katie. So let's break it down. The term opportunity cost is a little bit of a misleading term. Who's surprised? I feel like I give that caveat every single week on this show. But truly, it's not like other terms you may have heard that have the word costs associated. Like medical costs, for example.

If your doctor is talking to you about medical costs for a procedure, you know that you could probably request to see an itemized breakdown of the medical expenses associated with the procedure. But opportunity costs aren't something that you're ever going to see on a bill. Investopedia defines opportunity cost as the foregone benefit that would have been derived from an option not chosen. Shall we put that in plain English? Opportunity costs refer to the consideration that you should make when you're about to spend money, specifically considering how much that money would have worked for you if you used it in a're about to spend money, specifically considering how much that money

would have worked for you if you used it in a different way. Most commonly, people reference opportunity costs when they are about to make a big purchase, and they're considering how that money would work for them if, let's say, they invest it instead of spend it. Case in point, let's say we both have $100,000 right now. I decide I'm going to ball out and rent an apartment that will cost me $100,000 for the year or around $8,000 a month. You decide to put your $100,000 in the stock market. Assuming stock market returns stay at around 8%, after 20 years, your stocks would be worth a little more than $466,000. And I am $2 million in the hole from bawling out on rent.

So rewind those 20 years. When you and I were talking over what to do with our $100,000 and I told you that I was going to drop it all on rent, you may say something to me like, Nicole, but think of the opportunity costs. And I would say, you know what? You're right. Considering opportunity costs is how you look out for your financial self and how you hit that sweet spot in your financial mindset somewhere between thinking you're going to die tomorrow and planning on

living forever. But I know it's not always that easy. When you're going to die tomorrow and planning on living forever. But I know it's not always that easy. When you're tuning into Money Rehab, you're probably really freaking motivated to get your financial future together. But when the episode ends, did you keep that motivation going? It's one thing to be all gung-ho about your future self when you're on the road to financial freedom and I am waving a neon flashing sign that says start investing now. But it's another to keep focus when I'm in your rearview mirror. So how do you keep that motivation going? I solve this motivation problem by considering my investments as specific acts of kindness for my future self. The key for

me here is being specific. Whenever I'm tempted to skip a month of my investment or retirement contributions, I'll say to myself, for example, this contribution is for my old lady self to buy herself some beach chairs and a picnic lunch and a sexy old lady bathing suit to have herself a proper beach day plus an uber if that's still around to get to the beach and back i've found that if i assign my retirement contributions to specific spending allowances for my future self even if that assignment is just in my mind i'm much more likely to do it. If I get a little cash bonus thrown my way and I'm contemplating whether to buy myself something nice now or later, sure, I'm going to give myself small indulgences now, but I'll also put a lot toward my future self.

And I'll say to myself, sometimes even out loud because I am that kind of weirdo, you know what, old lady Nicole, take yourself out to dinner. Or, hey future self, you go out there and buy yourself something pretty. The future is always uncertain, but I can be certain that my 70-year-old self will say back, thank you, young past Nicole self, and take a little extra sip of that bubbly she bought to thank me for the work I'm doing now. For today's tip, you can take straight to the bank. You should weigh opportunity costs before making big purchases. Ask yourself, can this money work for you better if you spend it another way? I linked a compound interest calculator in the show notes to help you calculate

how you can grow your money if you consider your opportunity costs. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.