Recently had a buddy recommend I get a Nintendo Switch to be able to play games with him online. Harmless invitation. Friendly. But this is the rationale/dialogue that went through my head:
- Hmmm what’s a switch cost?
- $200?
- I’d rather invest that.
- Actually I bet it’s a lot more than $200.
- What could that amount to after 20 years!? I bet its a ton.
- Yeah I’ll invest the money instead.
Fact checking: Nintendo Switch $299 from Nintendo’s website or this snazzy bundle from Amazon with the docking station, Mario Kart, Animal Crossing (The Essentials! duh!) etc… is almost $600 at time of writing!
Yowza!
What IS the real opportunity cost of $600 invested? I would likely play the switch for the next 5 years, then it would be forgotten in a drawer somewhere.
If we invested $600 in well diversified stocks through an index fund and got a return of 7%, it would be worth $841. That would be nice to have in 5 years instead of an old video game system….
Investing the $600 instead of spending it (5 Years)
| start principal | start balance | interest | end balance | end principal | |
| 1 | $600.00 | $600.00 | $42.00 | $642.00 | $600.00 |
| 2 | $600.00 | $642.00 | $44.93 | $686.94 | $600.00 |
| 3 | $600.00 | $686.94 | $48.09 | $735.03 | $600.00 |
| 4 | $600.00 | $735.03 | $51.45 | $786.48 | $600.00 |
| 5 | $600.00 | $786.48 | $55.05 | $841.53 | $600.00 |
But that’s not the whole story. Because after 5 years the Switch would probably be worth some money, but not a lot. Lets say $150. So the net difference is $841-150= $691. Even so, I doubt we would actually sell it. Most things in life we buy and keep until they have very little value remaining or keep them until they stop functioning. Let’s calculate that more realistic scenario.
“Keeping the Switch forever” Scenario
Purchase price $600
Value after 20 years: $0-$50
Net difference: ($600)
Yes the Switch added a little entertainment benefit to our lives, but realistically we already are saturated with possible sources of entertainment. Just Youtube, Netflix, Amazon Prime Video, HBO Max, and Hulu provide so much content that keeping up with your favorite 2-3 shows on each platform is basically a part time job! We are in no way lacking in forms or amount of available entertainment methods.
What would happen if we invested that same $600 for the same 20 year period? Even without opening the calculator.net Investment Calculator, I can tell you 2 things.
- We would have more time available to do other things. Buying new toys automatically invites a Time Vampire into your home. It is a hungry vampire and it even has the strength of sunk costs to empower it. We think that because we just bought this new thing that we “should use it”. And we do. That time can never be returned.
- We would have more money if we invested than if we spent it. This one is obvious and you can see the trend here, but it’s still worth acknowledging out loud. Do you/do we want another thing taking up space in our lives and in our drawers? Or do we want to employ our dollars to go to work for us?
Ok now it’s time for the Investement Calculator. This one is simple and I find myself coming back to it. https://www.calculator.net/investment-calculator.html
Investing the $600 instead of spending it (20 years)
| start principal | start balance | interest | end balance | end principal | |
| 1 | $600.00 | $600.00 | $42.00 | $642.00 | $600.00 |
| 2 | $600.00 | $642.00 | $44.93 | $686.94 | $600.00 |
| 3 | $600.00 | $686.94 | $48.09 | $735.03 | $600.00 |
| 4 | $600.00 | $735.03 | $51.45 | $786.48 | $600.00 |
| 5 | $600.00 | $786.48 | $55.05 | $841.53 | $600.00 |
| 6 | $600.00 | $841.53 | $58.91 | $900.44 | $600.00 |
| 7 | $600.00 | $900.44 | $63.06 | $963.47 | $600.00 |
| 8 | $600.00 | $963.47 | $67.45 | $1,030.91 | $600.00 |
| 9 | $600.00 | $1,030.91 | $72.17 | $1,103.08 | $600.00 |
| 10 | $600.00 | $1,103.08 | $77.22 | $1,180.29 | $600.00 |
| 11 | $600.00 | $1,180.29 | $82.61 | $1,262.91 | $600.00 |
| 12 | $600.00 | $1,262.91 | $88.39 | $1,351.31 | $600.00 |
| 13 | $600.00 | $1,351.31 | $94.58 | $1,445.91 | $600.00 |
| 14 | $600.00 | $1,445.91 | $101.21 | $1,547.12 | $600.00 |
| 15 | $600.00 | $1,547.12 | $108.32 | $1,655.42 | $600.00 |
| 16 | $600.00 | $1,655.42 | $115.88 | $1,771.30 | $600.00 |
| 17 | $600.00 | $1,771.30 | $124.01 | $1,895.29 | $600.00 |
| 18 | $600.00 | $1,895.29 | $132.67 | $2,027.96 | $600.00 |
| 19 | $600.00 | $2,027.96 | $141.96 | $2,169.92 | $600.00 |
| 20 | $600.00 | $2,169.92 | $151.90 | $2,321.81 | $600.00 |
Well lookie here! We are at $2,321! Ok, ok that’s not a ton of money. I agree. We won’t be impulse buying a Maserati with it. But let’s compare the net difference again.
Purchase price: $600
Value after 20 years: $2,321
Net Difference: +$1,721
In other words, we were paid over $1700 just to not spend money on a toy we don’t need. I’m not an advocate for minimalism or abstaining from good and fun things that cost money. Almost the opposite actually. But this kind of long-term thinking helps me actually calculate the cost of our decisions.
Spending $600 isn’t as simple as: “Do I want this object enough to spend $600 on it.” It’s more like: “Is this object so wonderful that I am happy to give up $2,321 to play with it for a few years?”
This doesn’t even factor in the potential implications for early retirement. We aren’t focused on retiring as early as possible, but I AM intrigued by the possibility. In 20 years, having another $2300 invested means we could count on having an additional $92 per year or $7.67 per month for the rest of all time! That’s not a ton of money but it would pay for a couple nice coffees every month during our retirement. If we abstained from 3 more random $600 purchases and had something like $30 per month, we could have a fancy coffee every week for the rest of all time for “free”!
(For reference this math is based on the 4% rule. For more info just Google 4% rule or Trinity Study)
Choose wisely. Move forward! Save lots. Invest often!
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