top of page

How to Spend Less and Save Using Opportunity Cost

It only takes seconds to spend hundreds of dollars. You see a great internet deal, but there are only a handful left, and you're afraid of missing out, so you buy now or forever miss out. Your money has been spent and is no longer available.

It's admirable to strive to eliminate one-click shopping and highly targeted advertising, but it's exhausting. You may succeed in the short term, but over time, your self-control will be depleted, and you will quickly spend again.

So ask yourself – what should you do?

There's a simple financial solution to help you cut back on spending and be more careful of your money. It only takes 30 seconds, and it begins with a little behavioural economics and an examination of your “opportunity cost”.

What is Opportunity Cost?

When we spend our money on one thing, that’s money we aren’t spending on something else. Money we spend today can’t grow through compound interest and be spent tomorrow. What’s the trade-off?

There are other methods to spend money, which many people are surprised to learn about because we don't usually think about them. We concentrate on the present moment and the only option available to us.

When you can reframe and reflect on your spending decisions by weighing the trade-offs, you’ll grow not just in wealth, but in health and happiness too.

How to Cut Spending

Step 1 – Reconsider: Before buying anything, reframe your spending decision by asking yourself: What are the alternatives to buying this thing? What else could I do with this money? What’s the trade-off?

Step 2 –Reflect: Consider the last time you spent money on something comparable and how you felt. Were you pleased at first, but disappointed when you received the bill? Did you feel happy, sad, or guilty when your order arrived?

Reflecting on past spending decisions can help you tap into how emotional spending feels and bring you back in touch with more mindful money habits.

Opportunity Cost Example

Step 1 – Reconsider

  • Can you make do with something you already own?

  • Would you buy a less expensive item? Secondhand?

  • Can this money be used better elsewhere? Pay down debt? Saved to achieve a future financial goal?

Step 2 –Reflect

  • Is there a similar past spending decision you can revisit? How did that go?

  • How many hours do you have to work to buy it? How much of your life are you trading to make this purchase?

  • Do a little math. Total the money to be spent, calculate at 6% compounded over five years. It adds up!

Opportunity Cost and Compound Interest

Another technique to evaluate a spending decision is to use compound interest to determine the money's future value.

Let's say you spend $75 every week at a fine dining restaurant. It's a pleasant habit, but you do the math and discover that money invested at 6% compounded annually would be $4,017 after a year and $8,282 after two years.

What choice would you make differently now?

bottom of page