iPhones are the most dominant smart mobile device in the U.S and many consumers don't think twice about upgrading to the latest and greatest model every year it is introduced. This is just one example of the detrimental habits that the average consumer has because they don't know how much those new iPhones, luxurious clothes or consistent nights out are costing them.
The new iPhone costs around $1,000, but what if we told you that it was actually closer to 4 or $5,000, would that dissuade from upgrading at every opportunity? This additional cost is called Opportunity Cost. It includes the cost of not putting that money somewhere else, such as an investment. We calculated about $5,000 using the 'Rule of 72'. The Rule of 72 is a calculation method was discovered by mathematician Bartolomeo de Pacioli in the 15th century. It is used to calculate the number of years it takes for an investment to double in value. You simply divide 72 by the expected growth rate of an investment to get the number of years for your investment to double. Since the S&P 500, which is the most popular index to gauge the overall stock market, has returned an average of 10% since its inception, your money would double roughly every 7.2 years (72/10). You should be able to do some quick math in your head to determine how much that new item will cost you over a certain number of years. This concept instills a vital truth that saving and investing every chance you can is the most effective way to be financially free in the future. Warren Buffet, the infamous investor and founder of Berkshire Hathaway, is also famous for being extremely frugal. Bugget, whose net worth is north of $119 Billion, buys marked down cars, had a flip phone only until recently, and even used to wash his car in the rain to save money on water.
We understand that you are a very hard worker and you do deserve to treat yourself to nice things that you enjoy, but truly understanding the opportunity cost of each dollar you spend is crucial in putting your financial goals in Perspective. Maybe next time you will think twice about going out for drinks every Friday and Saturday night, not only for your health, but for your future self that will be nearing retirement.
"Don't save what is left after spending; spend what is left after saving" - Warren Buffet
Disclaimer: We do not offer professional financial advice, only commentary on what we have seen in the market and where we think the market can head.
Note: All investments have the potential to lose significant value, please use caution when seeking investment opportunities.