Hello, my name is Alexis and I am a current Honors student, Phi Theta Kappa member, inducted member of the National Society of Leadership and Success, and a former active participant in the Gaining Momentum program at Austin Community College. With the Gaining Momentum Program, I began my journey to financial freedom by creating a debt repayment plan and starting an emergency savings fund. However, as I paid off my debt, I found myself wondering what to do with the extra money in my budget. After reading an iGrad article, “The Opportunity Cost of Saving vs. Spending” by Anders Skagerberg, I knew that I needed to reevaluate my approach to managing my money.
To manage my newfound funds, I started cash stuffing, setting aside a certain amount of money each pay period for specific expenses such as dining out, traveling, and even Starbucks runs. But as I continued to spend money on these discretionary expenses, I realized that my spending habits were not aligning with my long-term goals. This phenomenon is called “lifestyle inflation” or “lifestyle creep,” where your spending increases with your income. I needed to consider the opportunity costs of saving vs. spending.
Opportunity cost refers to the potential gains you miss out on when you choose one thing over another. For example, if you choose to spend money on a vacation instead of saving for retirement, you may miss out on the opportunity to retire comfortably. But if you save for retirement instead of going on vacation, you may miss out on the experience and enjoyment of a vacation. In personal finance, everything is a tradeoff, and those tradeoffs are your opportunity costs.
To find a balance between saving and spending, I had to consider my short-term and long-term goals. “We all have a limited supply of money, which means we all have to make choices when it comes to how we use it…like choosing between going on a vacation or saving for retirement” (Anders Skagerberg). One of my goals was to stress less about finances in the future, including retirement. So, I decided to take money from my vacation savings fund to invest in a Roth IRA account to ensure I could retire comfortably. Although vacations can be exciting and relaxing, I find joy in daily reading and researching, which costs little to no money. By cutting back on my vacation savings, I could invest more in my future.
Finding a balance between saving and spending is essential. “Saving money every chance you get may not be sustainable if it causes feelings of deprivation due to ultra-frugality” (Anders Skagerberg). It is crucial to budget accordingly, review expenses and spending habits to identify trends, and save enough to reach your financial goals while not feeling deprived. However, finding this balance is different for everyone. Therefore, it is essential to be aware of the tradeoffs and check in with how you feel about your financial choices.
The opportunity cost of saving vs. spending is essential to consider when creating a budget and financial plan. By identifying and balancing short-term and long-term goals, we can make informed financial decisions and allocate our money effectively. Finding a balance between saving and spending is different for everyone, but by being aware of the tradeoffs, we can create a sustainable and fulfilling financial future.