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Retirement Guru: When $1 is not $1
When it comes to spending, we often focus on the short-term benefits and forget about the long-term consequences. However, understanding the concepts of opportunity cost and compound interest will revolutionize our spending habits. In this post, I’ll explore how spending $1 today, is equivalent to spending $5 tomorrow and why we need to prioritize needs over wants.
The Hidden Expense
Opportunity cost refers to the value of the next best alternative forgone when making a choice. In the context of spending, every dollar spent on a want (e.g., a cup of latte or a new video game) means a dollar less available for a need (e.g. investing for retirement). By choosing to spend on a want, we incur an opportunity cost – the potential benefit we could have gained if we had spent that dollar on a need instead.
The Compound Interest
Compound interest is the concept of earning interest on both the principal amount and any accrued interest over time. When applied to investments, compound interest can generate significant returns. By prioritizing needs over wants, we can harness the power of compound interest to grow our wealth.
