Chapter Seven

Indispensable Economic Principles

Part 3: The (Opportunity) Cost of Paying Cash

Economic Fact: We finance everything we buy, with interest paid or interest lost (not earned).

Recognizing that we are consumers first and foremost, and that we do finance everything we buy, allows us to analyze the costs and choose the best option of how to “finance” what we buy. Since it is typical that 95% of income is spent, this is a big area of positive opportunity rather than a pit of opportunity costs.

In Chapter 5 we saw the cost of financing a car with a standard credit union/bank loan. Here we will look at the cost (which is opportunity cost) of paying the $15,782 in cash for that car.

Obviously, to pay cash the money must be saved first. It is in some kind of account; it is (or could be) earning interest. The following table shows what the future value of that account would be if it was kept and grew at 8%, and is shown as FV. If, as in this example, the cash was withdrawn and paid out for the car there would be no growth. The lost growth is the opportunity cost of paying cash, and is shown as LOC.

You did get the car. Even though it evolves into a 3x3 chunk of metal we assume you got your money’s worth so the $15,782 paid for it was not included in the LOC. Once put in motion LOC never stops growing… the cost of the car is never returned to be invested.  

This economic principle applies to everything you buy, large and small. An alternative is to “be your own banker” and account for lost growth – and inflation since you’ll probably want another car (or whatever) some day – in your “financing”. We can show you how.

To email a question for an emailed answer, please click here.

To learn more about how “being your own banker” will turn the
Opportunity Costs of paying cash into increasing wealth, please click here.

Back	Next (Chapter 8)