Do you value your aspirations over your assets? Using opportunity cost to let go of stuff and invest in living quality

“Where would you like to go?” I asked.

“I’d love to see the cherry blossoms in Japan ever since I was a young girl. I think maybe someday I’ll go.”

It was at that point that I knew she was lying.

I couldn’t blame her though. After all, our family friend, let’s call her Amy, is one of the kindest people I know. She is 58, divorced, and has raised an incredibly smart daughter who lives a very happy life in New York.

Amy makes a slightly below average income. She isn’t middle class, but she also isn’t poor.

I couldn’t blame her. Because she wasn’t lying to me, she was lying to herself.

I’ve had this conversation before, not with Amy, but with countless others.

I think we’ve all learned that the moment you hear someone say, “maybe someday,” you know that translates to “never.”

It hurts to write this, after all I care for Amy very much, but Amy will probably die before she ever sees the cherry blossoms.

The kid in the candy store

I recently read about an interesting idea called “opportunity cost.” It’s an idea that has been around for awhile, but it’s a hard idea to use. What’s troubling is that it can probably have a huge impact on our lives, if only we could apply it.

Opportunity cost says that whatever decision you make, not only costs you that decision, but it also costs you all the decisions that you can no longer make.

The simplest example of this is a child that has $5 in her pocket. She goes to the store to buy a candy. There are 20 candies to choose from and let’s just say they all cost $5.

Whichever candy she chooses will cost her just $5, right?

In a sense yes, but also no.

Whichever candy she buys costs her the $5, but it also costs her all the other candies which she will no longer have the opportunity to buy.

That’s pretty simple to understand.

Where this gets interesting is when we rewind further back in the story.

Because when the little girl chooses to buy the candy, she also forfeits the opportunity to buy anything else, like a game or a book.

There’s another thought that’s even scarier.

When she chooses to go to the store, she forfeits all the opportunities that could have happened if she hadn’t gone to the store. For example, what if she had bumped into a boy on her way home and that boy became her best friend for life?

These mystery scenarios are interesting to think about, but since we can’t possibly predict all the things that could happen, they’re not quite as useful.

What is useful, and what could change everything about the decisions we make, is applying the first scenario to our adult lives.

Here’s how.

Trading our aspirations for our assets

Perhaps the most commonly universal dream I’ve come across is the desire to travel. Which is sad because apparently 42% of Americans did not take any vacation days in 2014.

Even those who do travel will admit that they’d like to travel more.

A useful exercise I learned in 2014 is the million dollar thought exercise. It’s simple:

“If you had millions of dollars, what would you do day-to-day assuming your finances are permanently taken care of?”

Most people choose one of the following:

Philanthropy
Business
Travel

The most common answer being Travel.

“If I could afford it, I’d love to travel.”

No one has encapsulated the absurdity of this statement better than Rolf Potts, in his book Vagabonding. Here is an excerpt:

Of all the outrageous throwaway lines one hears in movies, there is one that stands out for me. It comes from Oliver Stone’s Wall Street, when the Charlie Sheen character — a promising big shot in the stock market — is telling his girlfriend about his dreams.

“I think if I can make a bundle of cash before I’m thirty and get out of this racket,” he says, “I’ll be able to ride my motorcycle across China.”

When I first saw this scene on video a few years ago, I nearly fell out of my seat in astonishment. After all, Charlie Sheen or anyone else could work for eight months as a toilet cleaner and have enough money to ride a motorcycle across China. Even if they didn’t yet have their own motorcycle, another couple months of scrubbing toilets would earn them enough to buy one when they got to China.

The thing is, most Americans probably wouldn’t find this movie scene odd. For some reason, we see long-term travel to faraway lands as a recurring dream or an exotic temptation, but not something that applies to the here and now. Instead — out of our insane duty to fear, fashion, and monthly payments on things we don’t really need — we quarantine our travels to short, frenzied bursts. In this way, as we throw our wealth at an abstract notion called “lifestyle,” travel becomes just another accessory — a smooth-edged, encapsulated experience that we purchase the same way we buy clothing and furniture.

I’ve heard similar stories from several friends who make $60,000+ per year. They’re going to work for a few years, save up, and then travel the world.

I even had one friend named Sam who did just that.

Sam saved up for 2 years, working a job that wasn’t terrible, but that he certainly didn’t like. Everyday at work he would tell me about the latest crap that his boss had stuck him with that he hated doing.

He hated his day to day, but he still had his travel to look forward to so it was bearable.

Eventually he had saved up “enough” and pulled the plug. He took off to Thailand where he said he would spend 6 months living like a local. He planned to work some small freelance jobs to bring in a little money and extend his trip as he saw fit.

Just 3 months after he left, Sam was back. He picked up another job he didn’t love and it was back to square one.

Now it should be pointed out that Sam had an amazing time in Thailand. Not only that, but he traveled all over Asia. Spending time eating exotic cuisines in Malaysia and even going on a yoga retreat to the Ashram’s of India.

He absolutely loved travelling.

So why was Sam back so quickly?

Part of it was that he ran out of money. Since he hadn’t traveled much in the past, he didn’t know the ins and outs of budget travel. When I say budget travel, I don’t mean living in a hostel eating rice and beans everyday.

Those who are veterans of travel know that the difference between eating a $45 generic pizza and a $15 authentic pizza in a city like Rome can literally be a difference of a few blocks and 5 minutes asking a local instead of reading a tour guide.

Here’s the problem that Sam, and many other travelers (myself included) experience: If you haven’t traveled much, it’s hard to travel much.

In other words, if you haven’t spent a lot of time on the road, spending an extended period of time travelling is actually very hard. The logistics will stress you out, you’ll overspend without realizing it, and ultimately you won’t be able to disconnect from your hometown comforts.

Rolf Potts explains that the single biggest mistake well-off travel-capable people make is that they postpone long-term travel to the end of their lives. Their whole experience of travel is in two-week (also known as too weak) periods and they never learn what it means to truly get away.

When they do attempt to get away, as Sam did, they are unprepared for the mental shift that is needed to change their whole lifestyle.

But what does this have to do with opportunity cost?

In Sam’s story there was a ton of opportunity cost, from the time he spent “saving up” at his job to the money he spent travelling for 3 months.

He spent a lot. 2.25 years to be precise.

The reason that Sam’s trip was so expensive wasn’t because of the money he spent while abroad, it was because of the time he wasted saving up that money.

40 hours a week, 50 weeks per year, for 2 years.

That’s 4,000 hours of his life exchanged for 3 months of travel.

(Of course we can argue that some of the money in that time period was spent on rent, groceries, other activities, etc. But, we can also argue that he could be making that same money at a job he enjoys.)

How to downsize your opportunity cost

There are two ways that Sam could have lowered his opportunity cost.

1) by making more money per hour, therefore saving up to travel faster.

2) by spending less on the things that aren’t as important to him in the first place.

Making more money is the obvious answer, but it’s also a bit of a trap. As we all know, as soon we get a little bit more, we tend to spend a little bit more.

No further evidence of this is needed than the investment banker Rolf Potts described who makes millions of dollars, but still says that he needs more before he can quit “this rat race.”

I would argue that the better way to pursue our dreams is not by depriving ourselves of things, but rather by bringing opportunity cost into our daily decision making.

This means shifting our thinking from how much something costs in dollars, to how much it costs in opportunities.

For example, let’s pretend that Sam’s car is over 30 years old and it’s on it’s last legs. Looking at his options he determines:
a) He can keep maintaining his old car
b) He can buy another used car that isn’t as old
c) He can buy a new car

While at first glance the most frugal thing to do here might be to maintain his used car, there is actually a lot of opportunity cost involved in this.

The amount of money he’ll need to put into the car is unknown. It could be a few hundred dollars or a few thousand dollars…until the next repair that is. Plus, what happens if the car breaks down on his way to an important meeting? If that’s the case, the opportunity cost associated with missing that meeting grows dramatically.

The most reliable of the choices is to buy a new car. Most people buy a new car for three reasons: a) It’s easy b) It’s reliable c) It feels good.

These three arguments are very rational and make a lot of sense.

Yes, you should buy the new car. It costs a lot up front, but at least it will last you a long time.

But what happens if we look at this from an opportunity cost perspective rather than just a cost perspective.

Here is a breakdown of a 2018 vs 2013 Toyota Corolla. Both are very rational choices and far from something more luxurious like a Mercedes or Lexus.

The car figures above are all based on total cost of ownership, meaning it includes depreciation, maintenance, insurance, etc. Even if we completely disregard depreciation (the 2018 model loses $10,000 of its value in its first 5 years by the way), we can see that owning just a slightly used Corolla would give you $3,000 to travel every single year.

In terms of opportunity cost that’s huge. Here are a few examples of trips you could take:

The travel figures above are all based on actual trips I’ve taken over the last 5 years. These prices include flights, accommodations, food, activities, everything. You can also see more interesting travel options here: How to travel to exotic cities on $50/day.

When we run the numbers we not only see that the used car costs less, but more importantly, we can see that buying the used car allows Sam to travel 3 times, to 7 countries, and for over 3 months.

So, the new adjusted cost of a 2018 Toyota Corolla is actually $23,000 + the opportunity cost of going to Barcelona, Amsterdam, London, Argentina, Chile, Peru, and Thailand.

Ouch.

Dollars and Sense

I hope that people don’t get down on themselves from reading these numbers or from buying nice things.

After all, it’s nice to buy nice things.

And it’s not our fault that we want these nice things. Every year marketers spend TRILLIONS of dollars to convince us to buy nice things. They use manipulations, desires, and fears to convince us that objects will make our lives better (I should know, I’m a marketer by trade).

Being aware of this, one way that I try to counter-act all those marketing dollars is by weighing things in terms of opportunity in addition to dollars.

Dollars + Opportunity = True Cost

Using this framework isn’t just reserved to big purchases like a car. For instance, most of us buy an iphone just because we’re used to it.

An iphone will set you back $850. A Motorola, LG, or One Plus 6 will set you back between $300–500.

These phones aren’t as good as an iphone obviously, but they do 80% of everything just as well. So when debating your next phone purchase, do you think about pixels? Apps? Cameras? Status?

Or, do you compare the opportunity cost that an extra $400 will actually cost you?

There’s a great saying that, “Action expresses priorities.” I’d like to modify that to, “Purchases express priorities.”

So, the next time when I’m standing in REI or Sports Basement looking at all the shiny equipment that I want, I try to think about what else I could get for that same amount of money.

I could either buy this REI fleece jacket for $150

Or I could buy a jacket from Target and spend the other $100 eating breakfast in First Class on a train from Bangkok to Chiang Mai.

Either way I’ll have a jacket to keep me warm, so in that moment I guess what I’m actually choosing is my breakfast.

This post was a difficult one to write because I still struggle with this battle of things vs experiences. I’d love to say I’m perfect at judging opportunity cost, but I know I’m not.

I’d love to hear any other strategies any of you have been using to budget for your travel experiences. Feel free to leave a comment below and if you enjoyed this post I’d super appreciate it if you gave it a few claps using the green hands below!