Opportunity Cost: The Secret to Financial Independence

Opportunity cost is the concept of what you give up when you choose one option over another. In the context of Financial Independence and Surprising Wealth, understanding opportunity cost helps us make decisions that balance our present-day happiness with our future goals. Every financial decision we make — whether it’s spending on a luxury item or investing for retirement — involves a tradeoff. By understanding these tradeoffs, we can make more intentional choices that align with our values and long-term goals.

What is Opportunity Cost?

Opportunity cost is the value of the next best alternative that you forego when making a decision. It’s not just about money; it can also involve time, experiences, or any other resource you value.

“But I Don’t Have Money to Invest!”

This is a frequent objection when newbies hear about the FIRE Movement, savings rate, and investing:

“Must be nice! I don’t have any money to invest because of [insert reasons x, y, z]!”

While there are obviously a subset of households that are barely scraping by due to low wages or extraordinary circumstances, who have optimized everything they can think of… I’m not talking to you, and I wish for you better circumstances and opportunities. But I would hazard that the majority of households are simply not willing to get creative, problem solve, make temporary sacrifices, or stick to a plan.

Here is one of the ways we’ve made saving and investing possible, even as our household has typically earned less than 50% of the US population: Keeping electronics for a few years before upgrading.

The Smartphone Dilemma: A Case Study

Let’s use phones as an example. We typically buy a late model iPhone and then keep it for 3-4 years before upgrading again. Let’s compare Ms. Average Jane, who chooses to buy the latest smartphone for $1,000 each year, and Ms. Surprising Wealth, who buys a new smartphone every 3 years for $1,000. In the years she doesn’t buy a phone, she invests the $1,000 saved in an index fund with a 7% average annual real return.

Results after 21 Years:

• Ms Average Jane: Spends $21,000 and enjoys having the latest phone every year. Earns $0.
• Ms Surprising Wealth: Buys a new smartphone every 3 years, investing $1,000 in the years she doesn’t buy a phone. Over 21 years, she spends $7,000 on smartphones and invests $14,000. That $14,000 investment grows to approximately $30,910, thanks to compound interest and the magic of investing.

The Real Cost of Staying Up-to-Date

The opportunity cost of enjoying the latest phone every year, instead of feeling content with a good enough phone for three years, is the difference between having $0 in your investment account versus $30,910. If you extend this over longer periods of time, you will see even more impressive results. What would happen if you followed Ms. Surprising Wealth’s plan from age 25 to 65? You would have over $196k in your investment account.

Results after 45 Years:

• Ms Average Jane: Spends $45,000 and enjoys having the latest phone every year. Earns $0.
• Ms Surprising Wealth: Buys a new smartphone every 3 years, investing $1,000 in the years she doesn’t buy a phone. Over 45 years, she spends $15,000 on smartphones and invests $30,000. That $30,000 investment grows to approximately $196,867, assuming a 7% average annual real return.

Is that enough to allow you to retire? Probably far from it, but it is a sizable step in the right direction. If you can stack a few of these “sacrifices”, choosing things that you don’t feel too deprived for doing, it will add up to a surprising amount of wealth for relatively small actions. My 3-year-old iPhone is going strong and I feel very little FOMO compared to having the latest model. That single trade-off, made over my adult lifetime, means that by the time I’m 67, I’ll have $7,840* per year to spend in my senior years.

*4% Rule of Thumb ($196k/25)

Important: This is a Two-Part Plan

Important: This is a two part plan

It’s important to notice the key second step here. This plan is a two parter: 1) Spend less 2) Invest the savings.

It can be really easy to spend the money you saved with your frugal sacrifices. Or to just leave it sitting in a bank account earning little to no interest. To really reap the benefits and create Surprising Wealth, you have to invest. Lets take a look at the difference it makes. Lets say Ms Sally Saver follows the frugal plan of buying a new phone every 3 years for $1000, from the age of 25 to 65, saving $1000 each years she didn’t buy a phone, adding the savings to her bank account. At age 65 she would have spent $15,000 on phones and have $30,000 in the bank. Nice job! But please, please, consider the next step of investing your money. Compare Ms Sally Saver’s $30,000 in the bank to Ms Surprising Wealth who also spends $15,000 on phones but has $196,000 in her brokerage account because she invested in index funds with a 7% average annual real return. In our example, if you just did step one, you would miss out on $166,000 from compound interest returns on your investment.

This is an example of another opportunity cost. Ms Sally Saver traded the $166,000 for the convenience/security/easiness of just leaving her money in the bank. I’ll save this for future blog post topics, but lets just put a pin in it here: Security can be costly. Many people are so afraid of losing money, or so overwhelmed by the idea of learning basic investing skills, that they are willing to trade the possibility of earning life changing money from their investments.

Balancing Today and Tomorrow:

Opportunity cost is not about always choosing the most financially beneficial option. It’s about making informed decisions that reflect your priorities. Surprising Wealth encourages a balance between investing in your future and enjoying your present. By recognizing opportunity costs, you can make choices that bring both short-term joy and long-term fulfillment.

The Case for Memory Dividends:

Mr Surprising Wealth: Spends $500 on a weekend getaway with friends.

Opportunity Cost: That $500 could have been saved or invested, potentially growing to $983 in 10 years. Or $10,501 in 45 years. However, the immediate reward is a memorable experience that aligns with their values of spending time with loved ones and enjoying life now.

Mr Frank On FIRE: Skips the trip and saves the money instead.

Opportunity Cost: While they benefit from financial growth, and Mr Frank On FIRE may be able to retire a week early or even a month early, he misses out on the experience and the joy of creating memories with friends.

The tradeoff here is between future financial security and present-day happiness. Everyones situation is different. We all value things differently based on our own life situation and past experiences. (I highly recommend Morgan Housel’s The Psychology of Money if this interests you). In our case, we tend to place emphasis on present day experiences that we can’t go back and acquire at some future date (attending a family wedding, going on a special trip with friends, keeping our social network strong by attending entertainment events together, fulfilling dreams that we or our loved ones cant do when we’re older or frailer ala #DieWithZero). While at the same time, we are making sacrifices on other things (opting for more affordable housing, inexpensive cars, suggesting low to no cost social gatherings, fewer monthly subscriptions) that allow us to invest regularly for our future.

This is the Surprising Wealth Principles in Action:

The principles of Surprising Wealth — being intentional, embracing simplicity, seeking adventure, and more — can guide us in making decisions that consider opportunity costs. For instance, choosing to invest in a memorable experience rather than a material purchase might align better with your long-term happiness and financial goals. On the other hand, choosing to spend less on areas that matter less so you can invest for the future, is a key concept for creating your own unique Surprising Wealth Dream Life.