Opportunity Cost

Last night I heard a story about a young man who decided that he wanted to buy a certain Mercedes model. He actually set the money aside for the car (Novel idea, actually paying cash instead of financing). He promised himself that the first year he made 100k he would buy the car.

Well he soon made the 100k and headed down to the Mercedes dealer in his old diesel VW Rabbit. The salesman looked down his nose at the still young man who drove there in a "beater" car and asked him how he expected to pay for the Mercedes with a price tag of 40k? The young man replied, "I'm going to write a check". The salesman changed his tune and off they went for a test drive. The young man was pleased with the car, it truly was everything he wanted right down to the leather seats!

Ultimately, the young man decided not to part with his hard earned 40k. Instead, he put it in a mutual fund and left it there. One day 12 years later the was driving his Rolls Royce and pulled up alongside the very model of the Mercedes that he had so dearly coveted. He rolled down his window and said to the man driving it, "I don't wish to be rude but can you tell me about your car?" The man told him that he had just purchased the car and it was in mint condition. He went on to say that he was able to buy it at book value for $4,000! The young man smiled and said thank you and they parted ways.

The young man learned a valuable lesson about "Opportunity Cost" that day. You see, 12 years ago he could have bought the Mercedes for $40k and today it would be worth 4k. Instead, he left the money in a mutual fund and 12 years later it was worth over $300,000!

12 years ago he could only use that money for one purpose and he chose to reward himself by saving for his future rather than spending it in the present!

What a great lesson to learn. I am fortunate to have all of my needs met everyday. May I be wise with my extra income and not waste it by failing to understand the opportunity cost.