Opportunity Cost and Holidays: Should You Stretch Your Budget for a Longer Vacation?

by Stacy Francis, CFP®, CDFA

During the latest Savvy Ladies teleconference, the topic of conversation was much rosier than the typical ones these days (unemployment, recession, and ways to cut spending). One member had just quit her job to realize a long-lost dream: to spend a year backpacking through Asia and Oceania. By staying in hostels and eating out of grocery stores, she wouldn’t use more money per month than a family visiting Disneyworld burns in a weekend. She was very proud of her calculation, and it does make a lot of sense ...except she forgot to consider opportunity cost.

 Since she won’t be making any money while traveling, she will also miss out on a year’s worth of salary. Whereas the family spending the big bucks during the weekend or while on paid time off wouldn’t face any loss of income.

 Now, whether a weekend at Disneyworld is as much of an experience as a month trekking the Himalayas, I am going to leave up to you to decide. But considering how often people forget about opportunity cost, I always feel obliged to point it out.

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Stacy Francis, CFP®, CDFA

Stacy Francis is the Founder, CEO and President of Francis Financial, Inc., a Wealth Management and Financial Planning firm. With over 18 years of experience in the financial industry, she is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a Certified Divorce Financial Analyst™ (CDFA™), and a Certified Estate Planning Specialist (CES™). She is the Co-Director of the Association of Divorce Financial Planners’ (ADFP) Greater New York Metro Chapter and a member of the Women Presidents’ Organization (WPO) and an honoree member of the Private Risk Management Association (PRMA). A nationally recognized financial expert, Stacy has appeared on ABC News, CNBC, CNN, PBS Nightly Business Report, The Today Show, Good Morning America, Fine Living Network, and The O’Reilly Factor. Stacy attended the New York University Center for Finance, Law and Taxation.

Opportunity Cost

by Stacy Francis, CFP®, CDFA

Strolling through Tribeca, New York this weekend, I stumbled upon a gorgeous cashmere sweater at a designer sample sale. It fit me perfectly; the only problem was that it was a still little on the expensive side, and I loved it in black and in grey. Torn, I spent a good half hour going back and forth between the two, before eventually settling on the grey one. This really got me thinking about opportunity cost, and how this is present every moment of our lives, always.

Whether shopping for the perfect house, car, or sweater, when you choose one, unless your budget has no limits, you have to un-choose the others. When you buy yourself a Mini Cooper, you give up having, say, a Lexus or a Honda – even one of those yummy Porsche Boxters. Whenever you open one door, you also choose not to open the others.

In finance, the concept opportunity cost becomes even more urgent. Whenever you choose to bet your money on one fund, you choose not to buy others. What if they take off, and yours doesn’t?

And in everyday decisions, like whether to go on a vacation or renovate the kitchen, there will always be things that you do not choose. Always be clear over what your goals and priorities are, and use these as a guide when faced with tough, high-opportunity-cost decisions.

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Stacy Francis, CFP®, CDFA

Stacy Francis is the Founder, CEO and President of Francis Financial, Inc., a Wealth Management and Financial Planning firm. With over 18 years of experience in the financial industry, she is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a Certified Divorce Financial Analyst™ (CDFA™), and a Certified Estate Planning Specialist (CES™). She is the Co-Director of the Association of Divorce Financial Planners’ (ADFP) Greater New York Metro Chapter and a member of the Women Presidents’ Organization (WPO) and an honoree member of the Private Risk Management Association (PRMA). A nationally recognized financial expert, Stacy has appeared on ABC News, CNBC, CNN, PBS Nightly Business Report, The Today Show, Good Morning America, Fine Living Network, and The O’Reilly Factor. Stacy attended the New York University Center for Finance, Law and Taxation.

How Much Is Your Time Worth?

by Stacy Francis, CFP®, CDFA

A friend of mine, who is a lawyer, left work early today to clean her house before her in-laws were coming into town. With her earnings in excess of $350 per hour, I frowned and asked why she didn’t simply hire a cleaning service. No, she said, I can’t do that. I can’t just waste money.

Waste money? Looking at it from a numbers perspective, here’s what happened. By leaving three hours early, she missed out on more than $600 worth of earnings. You can get a decent cleaning service around here for $15 per hour. So if my friend would have stayed at work instead of running home early, she would actually have saved $600-$45=$555. Hardly my idea of wasting money.

I know I’ve mentioned opportunity cost in this blog before, and this is an excellent example. How much is your time really worth? If you are a stay at home mom with no college education, chances are, it makes sense for you to clean your own house. But if you are a career woman making the big bucks, should you really spend five hours per week cleaning (or, for that matter, shopping for groceries), when you could spend that time at work?

When battling decisions like these, always consider the opportunity cost. If you weren’t at home scrubbing your bathroom floor, what would you be doing? What are you giving up in order to engage in your current activity? Then, lose that outdated yuppie guilt, and use a rational perspective. You’ll be surprised at the changes you’ll find yourself making.

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Stacy Francis, CFP®, CDFA

Stacy Francis is the Founder, CEO and President of Francis Financial, Inc., a Wealth Management and Financial Planning firm. With over 18 years of experience in the financial industry, she is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a Certified Divorce Financial Analyst™ (CDFA™), and a Certified Estate Planning Specialist (CES™). She is the Co-Director of the Association of Divorce Financial Planners’ (ADFP) Greater New York Metro Chapter and a member of the Women Presidents’ Organization (WPO) and an honoree member of the Private Risk Management Association (PRMA). A nationally recognized financial expert, Stacy has appeared on ABC News, CNBC, CNN, PBS Nightly Business Report, The Today Show, Good Morning America, Fine Living Network, and The O’Reilly Factor. Stacy attended the New York University Center for Finance, Law and Taxation.