Thanks to James Schaefer for the insightful comments, with kind attribution to the Journal’s Jonathan Clements and to Jim’s own brother, about the intriguing and powerful concept of “opportunity cost”. James’ letter appeared in Letters on October 23.

When we spend money on things we don’t need, not only do we lose that money, but we permanently deprive ourselves of what that money, better applied, could have yielded. $1 million (and maybe much, much more) is not lost by your carelessly misplacing it. It is lost $50 and $100 at a time. When you buy $10 glasses of beer, $15 glasses of wine, $50 lunches, $100 dinners, $125 ties and $500 shoes, you lose out on the future value those funds, if invested even in a poorly performing market, would have produced. Over a lifetime, the poorly performing markets will fade into nothingness and the long term results take effect. Indeed, the financial crises of the hour will one day be but a memory. The shock of realizing what you could have had will floor you and last a lifetime.

$1,000 per month invested at 8% for 35 years amounts to almost $2.3 million. Adjusting for 3% inflation, you would still have over $800,000 in today’s dollars. Take a look at your annual expenditures on things you don’t need and you’ll find the $1,000 (and maybe a lot more) a month.

Ignorance of the concept of opportunity cost can mean, after 35 years of well paid employment, having a negligible net worth at 60 and parking cars under the direction of a high school kid at 70. You can be young in this country and be without money but it’s really tough being old and in that shape and much worse to realize it needn’t have turned out that way. James’ brother advised saving “until it hurts.” What did he know that you don’t?

Richard E. Savoy
Boston, MA

The People Next Door

It seems easy to understand why the people next door drive a car that must be 14 years old, dress quite plainly and don’t much if anything on landscaping. He is a sell-employed carpenter and she is an assistant in a doctor’s office. Neither has a college education. But, each of their three children went to an Ivy League undergraduate college and then on to an Ivy League business, medical n law school. One of the children mentioned to you how grateful they were to have left school without a cent of debt. When you’ve spoken with either of the parents over the years, they’ve never complained about their children’s educational expenses or indeed about anything to do with money. How can this be? Their combined incomes can’t be over $100,000, yet it seems they may have paid over a half million dollars in educational expense for their children. Your annual household income is $250,000 but you live paycheck to paycheck.

The main difference between you and your neighbors is that they are sitting on a stock portfolio worth $4 million, throwing off more than $120,000 per year in dividend income. You couldn’t raise $10,000 if you had a month to do it. How in God’s name did this come to be? Neither of the neighbors inherited anything.

Here’s what happened. In the early 1970’s, when your neighbors and you were in the early 20’s, they realized they would probably not make great incomes so they decided to live beneath their means, utterly to ignore advertising, to buy used cars, stay out of bar rooms, restaurants and malls, and to invest what little they could spare in the stocks of companies that sold things to other people, such as you.

They bought shares in what was then Philip Morris, and of Johnson & Johnson, Colgate Palmolive, Procter & Gamble, GE, Wal-Mart, Coca Cola, William Wrigley, and Abbott Laboratories. They got into Microsoft in the late 1980’s at 10 cents per share. They had the broker deliver the shares to them so that they could reinvest the dividends and buy more shares without paying brokerage commissions. Over a period of some 35 years, your neighbors invested maybe $200,000 of their own savings plus all the dividend income. While you were going through your considerable income buying new cars, running up big credit card balances shopping at Burberry’s, Barney’s and Brooks Brothers, Neiman Marcus, and Bloomindales, eating out 5 times a week, ordering drinks made with premium priced liquor and leaving money on the tables of Indian-run casinos, your neighbors were reserving against their future obligations and for a time when they might not want or indeed be able to work. While you were unable to separate your wants from your needs, your less well educated neighbors had no trouble doing that for themselves. The result is that capitalism turned your income into your neighbors’ principal. One not so small consequence was that their children could apply to Stanford, Princeton and the University of Chicago without requesting a cent of financial aid. If you don’t think that sways the minds of top college admission committee members, think again.

Now, your neighbors love their jobs, in large part because they know they don’t need them and could cease working on any given day. You and your spouse hate your jobs because you know you have to keep them and maybe to work until you are 70 or older. You might want to continue to be most cordial to your neighbors’ children. When you end up looking for a job, one of them might give you a reference.

Oh, wait…you suddenly awaken from the horror of this wretched scenario and discover it was but a dream and a nightmare at that. You are still only 28 and what has been written above is but one possible outcome. Fortune has favored you and given you a second chance. If you are comfortable with the future outlined above, keep doing what you’re doing and you’ll get it. Keep spending all your income on consumer junk and trying to live as if you were a person with money and be sure to plan to work for a high school kid when you are 70, maybe parking cars.

If, on the other hand, you want to be able to live more or less without financial worry, curb your spending now and begin investing. Sure, driving a flashy car, having $50 lunches and $100 dinners, drinking martinis made with Grey Goose vodka and buying $500 Jimmy Chu shoes seems stunningly enjoyable now, but, I assure you, it won’t come up to having $4 million when you are 60.

Well I would like to give a suggestion to the weekend money spill. #1 Learn to cook. Not only do you spend less on going out but IT REALLY CAN BE FUN (unless you are someone that ruins everything...then stay away). #2 for the 21 and over crowd, if you are young and refuse to give up alcohol or you insist on drinking hefty amounts, have 1 drink out and do the rest at home before you leave(so long as you have a DD). And finally #3, save your change! Especially if you are a cash user, save that pocket change in a jar at home. Around every couple months I cash out anywhere from $60-$100 bucks in my big jar. It really does add up.

I find this useful as the 4th of July is awaiting us. So much to do, so little money. I googled (as suggested) and I will now be having an expensive Independence Day weekend. Freedom really can be free! Thanks Ms. May...I'm really enjoying reading these.

Great stuff. would have been better off in college if I would have kept this in mind, keep it up!

The idea of keeping track of Happy Hours and other free entertainment is brilliant ! There is so much available if you are willing to hunt for it.

Another thought, Does Apple or Blackberry or both have an app for tracking expenses? much easier to log electronically, and you are most likely always carrying your phone anyway, so no need for additional "Little Black Book"? What do you think?

I wonder, if you are extra thrifty during the week, then maybe it's okay to spend more on the weekends. I often find myself skipping a lunch out with coworkers on a Wednesday so that I can go out to drinks or dinner on a Friday. I think it should be a matter of how much you spend overall, how much you can balance your budget.

Gotta watch out for that sangria. Thanks for the tips, definitely need to watch the alcohol spending at the bars on the weekend.

I love it -- the little black book for keeping track of finances instead of the traditional one used for keeping boys' phone numbers. This transition might just be another piece of evidence for the empowered women of our generation! How far we have come. My friends and I alternate doing happy hours at our houses/apartments and everyone brings their favorite drink -- this is a great way to save money on drinks -- then you only have to make one entry in the little black book for a liquor store purchase!

Your right the weekend is the fiancial killer of the budget. Clubs, Malls, and all the Shows at $50 a ticket. Since I've past the 20 crowd sometime ago, here are some things we do. Join a bike club (pedal), TV in the back yard (like drive-in only set-in). My wife and I (30 years) could go out for $10 for date night! Cheap I know, but we own our home! $5 for gas, $2 for movie (dollar show), and $3 for appitizer at local hang-out. Now we spend $25 gas, $10 for lunch, and enjoy the art shops in Jackson Hole. Not cheap, but the kids are gone, so we live a little. We have also camped alot raising our kids. Best way for them to grow up, just keep an eye on them. Also cost less than membership at a gym. Hope you all find less is more. We are all still very cheap, with steak and shrimp on the grill every Sunday afternoon by the pool (kiddy).

This blog is so beneficial because my situation is so similar to Steph's. I am a college student and I have to say that a lot of my priorities and goals go out the window on the weekend. We need to go into the weekend knowing that it is a time that we probably will struggle at keeping our financial goals. At the same time, it seems like Steph had some good times in her weekend like going to the free Jazz show and not ordering the expensive beer. While she probably thinks she struggled, she still made some good decisions.

I love your idea of a little black book. It would definitely help me out in my life to help me save money. Not only can you see what you are spending most of your money on, but also the total amount. I think the biggest issue would be getting used to always writing in your totals, but once you have that habit squared away, voila! Great blog again, Stephanie! I look forward to more.

Once again, you have made some important points about spending, in a clever, funny way. I love the fact that you are willing to admit your failures! It makes us all feel better about our own indiscretions. One of my biggest expenses comes from the fact that I go out to eat way too much. I'm just lazy and hate cooking! I plan to give myself a budget for the week, in cash, and see if I can stick to it. In the meantime, I think I'll go to my gym and spend time working out rather than going to a restaurant. It's a better way to get out of the house as well as to get physically fit.

This is so true! I definitely spend the majority of my weekly budget during the weekend... which makes even eating during the week a difficult task. I never thought of using a little black book to keep track of finances, but I think that is a great idea! The best things in life are truly free, so why not look around and learn what is free and fun to do in every city?!

I think you make a great point about the free things to do in your home city. It is impressive the things that are hidden away and not always the first thing on a 21+ adult's mind. However, you can really learn a lot about the city you live in, or even the state if you are willing to drive a bit, and just enjoy your time. If you live near a forest or mountains, take up hiking. It is an awesome way to experience your home for nothing but a little exercies.

Hey Steph,

Great thoughts on the weekend weight loss when it comes to your wallet. One of my best ways to stay fiscally fit on the weekends is to take out cash. I leave my card at home, which eliminates the possibility of any kind of overspening inebriated decision, or just spending in general. Hey, if you only take a $20 out for a night on the town--it is a guarantee that you will spend just that. I agree though, free finds in the city are the best. The same is true for NYC, so if you are ever out there, definitely just check out Time Out New York's free things to do. Keep up the blog!

im glad to see that im not the only one that wakes up monday morning wondering where my cash went. a little black book might be a good option for girls that have purses but what about us guys? good call on the happy hour specials by the way. those are key.

Are you saying that we have to be fiscally fit every day? How about if we do well Monday through Thursday and then sort of slack off for the weekend. No? The idea of finding free things to do takes some energy, but is a good idea. It is understandable why clubs and eateries have midweek specials, nobody is out. It is easy to be good when nothing is going on, but you are right it is harder when out with friends and everyone is wanting to have a good time. Enjoying your insights and ideas and it is helpful to have someone falling off the wagon publically to help those of us who fall privately not feel so bad.

Stu

Thanks for the great tips yet again! There are so many ways to have fun in an affordable way, especially on weekends in a big city. People don't understand that you don't need to buy the twelve dollar mixed drink, or the sixteen dollar baby back ribs to have a good night. Appetizers are filling, water saves calories, and it will make the friday happy hour all that more enjoyable. Keep it coming!