I once asked an Economics Professor to contribute an article to Simple Money Magazine.
My instructions were vague on purpose, “Assume you had opportunity to teach just one economic principle to every person on the planet. What is the one lesson you think is most important for everybody to know?”
I didn’t know what he would choose to write about. But to be honest, I was pretty intrigued to see which principle he would choose.
Want to guess what economic lesson he decided to teach?
Don’t overspend your income? Save every month? Learn about compound interest? How to create a budget?
Nope, none of those.
The ASU Economics Professor wrote about the economic principle of “Opportunity Cost.”
If you don’t know, the technical definition of opportunity cost is “the forgone benefit that would have been derived from an option other than the one that was chosen.”
In other words, with every purchase we make, there are sacrifices we assume—alternatives that we must forgo. Every dollar spent on an item is one less dollar that could have been spent somewhere else.
I loved his decision to highlight “Opportunity Cost” as the one economic principle he most wanted everyone to know. It is a concept that is an important principle for life—especially in an age where consumerism and choice often cloud our judgment.
Of course, it is also a principle that carries weight beyond mere dollars. Because sometimes the purchases we make require us to forgo alternatives that are bigger than dollars and cents.
Take the example of choosing whether to buy a new car or not. On one hand, we can see the opportunity cost very plainly. If I choose to use my money to buy a new car that means I have less money left over for a vacation or new furniture or new clothes. But, if I have those things already, the opportunity cost seems slim.
Not to mention, there are advertisements, all day long on television, encouraging me to buy the new car. It will be adventurous, it will be flashy, it will draw attention, it will bring luxury into my life… it will spark new and amazing outings with my family that I apparently couldn’t take in my old car.
The decision quickly becomes an irresistible one. I want the new car and am willing to part with the dollars. The opportunity cost is worth it, I convince myself.
But what if the purchase of that car brings more than a new set of wheels into my driveway? After all, unless I am paying the full-price in cash, it will also bring a monthly car payment.
And debt, especially for a depreciating asset like a new car, becomes a constant burden. The immediate gratification of driving a new car off the lot is quickly overshadowed by the years and years of monthly payments, the interest, the insurance, the depreciation, and the stress of now needing to maintain something more valuable.
In this scenario, the “cost” of the vehicle wasn’t just the sticker price and terms of the car loan, it also cost me a measure of peace. The “opportunity cost” was more than just what items the dollars could have been spent on economically—the opportunity cost also included my well-being.
And, as the old saying goes, “Anything that costs you your peace is too expensive.“
In this scenario, I had to give up something potentially more valuable than dollars. I had to sacrifice calm, peace, financial freedom, and the satisfied feelings of knowing the car I drive is fully paid for.
Now, this isn’t to say that there is never a time when a vehicle needs to be replaced. It’s just to say: Given the options, it’s often better to drive an old car with peace of mind than a new car burdened by stress and debt.
And of course, the application of this principle extends far beyond the driveway. We see it all around us.
Almost every day, we are presented with opportunities to spend our money on more and newer things. And while not every purchase may require a loan like a new (or used) car, the cumulative effects of those financial decisions begin to play a significant role in our lives.
Consider these examples:
Smartphones. Every year, new models tempt us with slightly better cameras, marginally faster processors, or just a cool new color or design that everyone seems to want. Many people do choose to make a monthly payment on these devices. But even if you don’t, is buying a newer phone really worth the price every year—or even every couple years? Especially if there are other debts you are currently repaying? Wouldn’t it be better to use an older phone and get out of credit card debt than buy a new one?
Homes. The average American home has tripled in size in the last 50 years. They continue to get bigger and bigger. And we continue to buy them—despite homes becoming less and less affordable. But just because the bank pre-approves you for a mortgage loan doesn’t mean you need to spend the entire amount on your purchase. It is important to also ask, “What amount of my peace and life am I sacrificing just to live in a bigger house?” Wouldn’t it be better to live in a modest-sized home and experience more freedom than buy a big one?
Entertainment. A financial advisor once told me, “Most people who are struggling financially do so because they have overspent in one of three ways: 1) Too much house, 2) Too much car, or 3) Too much entertainment.” By entertainment, he meant the broadest definition (restaurants, vacations, alcohol, shows, sports, events). Restaurants and trips and shows are certainly enjoyable—and there is no shortage of them available to us. But if the opportunity cost is getting ahead financially, is it worth the expense? Wouldn’t it be better to find simpler forms of entertainment and no longer stress about money than spending money every weekend on entertainment?
We live in a society that confuses success with material wealth. In that world, fancy cars, big houses, and the latest gadgets are always worth the price. After all, that is where the good life is being lived.
But deep-down, we know better than that and want something different. We want to live responsible lives. Not in debt, but within our means.
To accomplish that, we must actively and intentionally wage war against the temptations to accumulate that surround us every day.
And one way we do that is to count the opportunity cost of every purchase. Not just in terms of the dollars that could be spent elsewhere (although that is a concern). But also in the peace and freedom we sacrifice in every purchase.
I don’t know about you. But I’d much rather live in peace with less, than stressed-out with much.
Carolyn Murphy says
While I agree with your comments, I might comment for senior citizens. I managed to pay off my mortgages when I retired at 70. I drove a car I bought new in 2004. When I moved to FL I purchased a new SUV with all of the safety features. It is probably the last car I will ever buy. I paid cash. As an old lady, those features are invaluable. The car size and type allows me to load up people and gear when I have guests. It is under warranty for some time and I did not buy someone else’s problems. Women are often taken advantage of when shopping for car repairs. I still have the 2004 car in my summer shack and it does not owe me anything.
I think my choices for my age and abilities make sense. My homes are decluttered thanks to you and my life is simple and wonderful. I do not have to worry about breaking down and sitting alone by the side of the road. A younger me would not have cared. I spend wisely. I thank Joshua for my new life.
Laurie says
I have a different take on this subject. Freedom and safety. I like to buy a new car when mine gets around 80,000 -100,000 miles. Of course this will depend on brand and make of the car. But, as cars get older they require more work. Which means scheduling an appointment, Do I have $200 – $2,000 in cash laying around or does this get added to my already large credit card? Two months ago I found out a had a crack in the engine block, after taking it back and forth to mechanic to finally figure it out. It ended up being a manufacturing defect and was covered, $7,000. Crazy!
Do I love the monthly payments? No. But I get a piece of mind, a sense of security, that I have a coverage for repairs that can be very expensive.
Beth says
I also have been reading your blog for a very long time and have never commented,.
This time I must because you are so right!!
I owned a consignment shop for almost 30 years! Why pay full price??
I appreciate your blog. Thank you for what you do.
Lori Kleiman says
Joshua, I have been following your work for years and greatly appreciate and value your message. Peace and simplicity are the lenses that I look through for all decisions….big and small. My 2010 car with 155,000 miles costs me next to nothing and does not use my income. That equals FREEDOM. I’ll take that any day.
Alexander Rivera says
This article gave me a slap in the face. Very good information. I really need to change bad habits around my expenses .
ChuNam says
Thank you for a wonderful article about how spending brings happiness. There are indeed many temptations that lead us to spend all our money and plunge into debt. I have not spent my money hastily, always considering prioritizing emergency savings, reinvestment, and only then spending. I embrace my current life with what I have because I understand the true value they bring and I love it, it also brings peace of mind to me.
Patricia Frank says
Your article really resonated with me. I found it wise. The process you went through in reaching your decision was interesting to experience. As the driver of a 20-year old car, I found myself nodding in agreement with you. I, too, would like a new shiny car but am not willing to spend the bucks. A goodly number of years ago, I read a book that profoundly influenced my life. Its title was Living Poor With Style. It shaped my life in many ways. I’m very well-dressed, our house is nicely furnished and decorated. All achieved through buying second-hand clothes/furniture/art/books. My entire life(style) is what I call “Living Down with the Joneses” rather than “Keeping Up with the Joneses”. Let the Jones family do what they will. For me, feels wonderful to be debt-free! I sleep great at night. No worries! Peace of mind is priceless. Thanks for sharing your wisdom and fine writing!
Catherine A Hazur says
I stand with you 100%, Patricia. Wise choices all around. Not to mention that in 2ndhand shops, it’s so much more fun to shop, because you never know what you’re going to find. It’s never boring!
Linda Landine says
Joshua, I have been reading your blog for many years and don’t comment. I nod my head in agreement and am thankful for your reminders. So, my comment today is keep up the good work, there are many silent readers out there who really appreciate what you are doing.
Amy Gulbrandson says
Agree 100%, Linda! I’m one of the silent but appreciative ones too!
Catherine A Hazur says
Lets not forget that the “smart” NEW HOUSE, CAR, or GADGET means constant SURVEILLANCE of you every second of every day. Is this simplicity?
Try counting the cost of getting these large ticket prestige items “repaired” or “replaced” when malfunctions occur…..!
Dana Casey says
I have thought about getting rid of my smart phone for both increased savings and privacy. Unfortunately, so many things like restaurant menus and city parking require a smart phone. And since i moved to an entirely new area of the country, I depend on Google maps. Does anyone have thoughts on these?
Eileen Manganella says
Agreed! 🙋🏻♀️ silent reader here! Great job.
joshua becker says
Thank you Linda! I appreciate the kind words. They are more encouraging to me than you might guess. So thank you for taking the time.
Jessica says
I’m sending this article to as many people as I can and posting it on my social media. Your words generally embody why I have so much joy living with less: smaller house, paid for car (I recently drove a brand new rental for 3 weeks and thought how “nice” it would be for 2 seconds). But I love Norma (my 7 year old Nissan) and the adventures we have been on together. I haven’t worked full time since 2020 and my peace has grown exponentially. I never plan to work FT again. I have retirement and health insurance. I have time with friends and family. I have time to clean my house without stressing every weekend. And I live on much less financially to afford this truly abundant lifestyle in the ways that matter to me and my family. Thank you Josh for continuing to inspire me and hold my thoughts accountable.
Jen says
Drove our car, one car for two people, for 20 years. Our friends thought we were crazy. You had to wind down the windows! All those years, we were able to use monies for other things and experiences as well as save for the inevitable day our car would need to be replaced. So simple!
M says
I’m with you, Jen!
(Better a well-running vehicle with manual rolling windows, than a vehicle that won’t start and/or run in the cold.)