There's an interesting economic concept called "opportunity cost." According to Wikipedia, it measures "the cost of something in terms of an opportunity forgone (and the benefits that could be received from that opportunity), or the most valuable forgone alternative."
To understand it better, let's consider some common expenses in the entertainment arena. Why am I targeting entertainment? Well, according to a recent New York Times article: "The average American spends more on entertainment than on gasoline, household furnishings and clothing and nearly the same amount as spent on dining out, according to the Bureau of Labor Statistics. Among the affluent, the 20% of households with more than $77,000 a year in pretax income, more money is spent on entertainment -- $4,516 a year -- than on health care, utilities, clothing or food eaten at home."
Here's the opportunity cost: If that $4,516 had been plunked into an alternative, like a top-performing mutual fund, and it earned an average of 13% per year for the next 25 years, it would amount to more than $95,000. Think about this. If this situation is anything like yours, it means that if you did without those entertainment costs for just one year and invested the money instead, your retirement would be better off by nearly $100,000. If you planned to withdraw 4% of that money per year in retirement, as our Rule Your Retirement newsletter has advised for many people, it would contribute more than $3,800 each year in your golden years -- nearly as much as you're currently spending on entertainment in one year!
Am I using far-fetched numbers? Not necessarily. Some top mutual funds have averaged annual growth of 13% or more over many years. And $4,516 isn't so hard to spend on entertainment. Imagine these costs, for example:
|per month||per year|
|Netflix (Nasdaq: NFLX )||18||216|
|XM Satellite Radio (Nasdaq: XMSR )||12||144|
|TiVo (Nasdaq: TIVO )||17||204|
|Nights at the movies||15||180|
|Books, CDs, videos, magazines||50||600|
|Sports events, concerts||50||600|
|Nights on the town (dining, drinking)||60||720|
Sure, your own numbers are most likely different. You may spend much more on some of the above categories and much less on others, and I've certainly left out plenty of entertainment categories. Still, if you add everything up, you may find you're not far from the above total.
Making smart financial decisions doesn't mean you have to give up all the fun you love. But do take a little time to see whether you can divert some of your fun money to investment money. It doesn't mean you'll never see or enjoy it again -- it just means you'll enjoy it later.
Planning -- and investing -- for your retirement today can make a world of difference. If you'd like some help, my favorite retirement information resource is our own Rule Your Retirementnewsletter, edited by Robert Brokamp.
Here's a sampling of useful articles from past issues:
- The February 2006 issue covered inflation's effect on retirement savings, and offered tips to plan for it. The same issue also reviewed Joel Greenblatt's "magic formula" for investing, which has helped him achieve eye-popping average annual gains of 40% over 20 years.
- In the January 2006 issue, Robert tackled asset allocation and explained how we can "avoid Uncle Sam's grabby hands." He listed a host of popular investments, such as bonds and dividend-paying stocks, in order of tax efficiency.
- In the May 2005 issue, readers were taught how to withdraw money prudently in retirement, in order to make it last.
- The October 2005 issue offered several recommendations for dividend-paying stocks.
- The December 2005 issue covered Real Estate Investment Trusts (REITs) in detail, highlighting some promising investments.
Sound intriguing? See all these issues for yourself, along with Robert's latest good advice, with a free 30-day guest pass.
Longtime Fool contributor Selena Maranjian owns shares of Netflix. Netflix and TiVo areMotley Fool Stock Advisorpicks, while XM is aMotley Fool Rule Breakersselection. The Fool has a disclosure policy.