Every day, I hear people talk about retirement and make all kinds of assumptions about the life they will live when they forever exit the workforce. The harsh reality is that the overwhelming majority are not even remotely close to being able to produce the cash flow necessary to sustain their lifestyle once the paychecks stop. Sadly, for many people, it's not because of a lack of income during their working years.
The problem often comes down to choices that are made and the constant war being waged for your wallet. I've read some estimates that claim the average American is exposed to as many as 5,000 ads a day. These ads are promoting everything from basic necessities to more convenience, prestige, and luxuries as we seek out a better life. The purpose is to get you to part with your money today, in exchange for the product or service being offered. All too often, the messages are too powerful and folks over consume today and long term wealth accumulation suffers dramatically.
Before I go any further, let me just say I am all for the amazing time period we live in. There are more cool things to blow money on right now than at any other time in the history of the earth. However, all these cool things come at a price, and that price is far more than what is on the sticker.
In economics, there is a simple concept called "opportunity cost." For example, every dollar you make does one of two things. It is either used in the present or it is set aside for the future, preferably in a place that earns a return.
The choice to buy a $50,000 car today has a cost far beyond the price tag shown. If the car was not purchased, the money could have instead stayed invested, thus earning a return on your money. If your investments earned a hypothetical annual return of 6% over the next 30 years, the $50,000 would have grown to $287,175. If your investments earned 8% over 30 years, the $50,000 would be worth $503,133.
I am not saying you should never drive a $50,000 car or even a $100,000 car. What I am suggesting is the true cost of a purchase is not what meets the eye.
When you total up the amount of wealth that is lost over a lifetime to new cars every 5 years, bigger homes, frivolous spending, insurance costs, tuition, credit card debt, etc., the total wealth lost is in the millions of dollars for most people.
If there is gap between where you are headed with your wealth accumulation and the amount necessary to sustain your lifestyle when you retire, look beyond your investments and start considering the opportunity costs of lifestyle habits. A few changes that may feel rather meaningless today can add up to a substantial difference in your wealth creation.