Long term opportunity cost of impulse spending

In one of my earlier blog posts – Saving and investing money versus living life king size I have broached upon the concept of opportunity cost of saving/ investing. Post which I had discussion with few people on this and realized that this can be a concept that can be explored further.

Whatever you choose to spend/ splurge has a associated associated opportunity cost in terms of what that money can do in terms of future value if it is invested somewhere. For instance the fifth wrist watch you added to your collection after spending Rs. 3500 could have been avoided, and you could have invested equivalent amount elsewhere. Or the 4 unnecessary weekend pub hopping which costed you Rs. 5000 could have been invested somewhere. Or spending Rs. 500 per month on your DTH subscription which you don’t use because you have Netflix & YouTube! Or the Rs. 1200 worth of new gym bag when a regular bag may suffice …

Impulse buying

Agreed that one can’t keep on doing this for each and every spending. For instance eating out once a week may lift your spirits and hence good for you. But the second time eating out may be something that you could avoid.

Get the drift?

Suppose analyse the above and cut your discretionary spending by Rs. 5000 a month, from Rs. 20,000 to Rs. 15,000 (rest of your expenses being sort of unavoidable). This adds up to Rs. 60,000 a year. And for most of the people, this is not a small amount.

And if invested rightly, this 60,000 can be worth much more – A simple combination of debt instruments @ 7.5% average (Including VPF, PPF, FD etc.) can double this amount in a decade time. If invested in equities and if they do well and give 15% annualized returns, you can double your money twice in a decade (i.e. 4 X returns)

I am not suggesting that you do this with each and every line item in your expense sheet, but if you are often left wondering why you are unable to save/ invest, you may want to consider this for discretionary expenses and the places where you are prone to impulse buying!!

What are your thoughts?

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Originally published here

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