Our financial choices

One of the things I learned many years ago in Economics 101 was the importance of knowing the opportunity costs of our choices. The opportunity cost is the price of the next best thing you could have done had you not made your first choice. If you have a thousand dollars and you choose to buy a new cell phone with that money you have also chosen not to spend that thousand dollars to purchase something else. What you could not buy with that thousand dollars is the opportunity cost of your decision. It's an important concept to keep in mind when you are making financial decisions.

Many today seek immediate gratification. They see something they want and they buy it without thinking about the opportunity cost of that decision. There are people who will buy the latest phone as soon as it comes out and then not be able to pay their rent. They want a new car so they finance it for seven years without ever considering what that car will actually cost them when the interest on their car loan is added in and without thinking about the things they won't be able to do because they have to make a car payment.

This desire for immediate gratification is going to be costly. According to one study three out of five Americans have less than $10,000 in retirement savings, and one-third have nothing saved for retirement. Contrary to what some people think, retirement will come one day for most of us, and without adequate savings it will be a difficult time.

Dave Ramsey recommends that people put 15 percent of their income into a retirement savings account. Others recommend 10 percent. I'm no financial expert, but I would think somewhere between those numbers would be pretty good if it was done consistently and invested well. Right now some of you are arguing that it's not possible for you to put 15 percent of your income into a retirement account. Here's where that opportunity cost thinking comes into play. If you choose to spend more than you make each week, you are exactly right. You can't put 15 percent into retirement. In fact, you can't put anything into retirement because you've already spent more than you've made.

However, what if you put 15 percent into retirement before you did anything else with your money? Let's try this formula. Our of each paycheck you pay yourself 15 percent of your income and put it into a retirement account, you take another 10 percent and pay your tithe to your church or synagogue, and you are left with 75 percent of your income to live on.

I realize that many cannot do that because of the debt they carry. You chose to go into debt. Now is the time to choose to get out of debt and get serious about saving for retirement. I can tell you from experience it's a lot easier to get in debt than it is to get out. To go into debt all you have to do is sign on the dotted line. To get out of debt you have to become an adult, sacrifice, be disciplined and follow a process. The best process I found for getting out of debt, and the one I used, is found in Dave Ramsey's book The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness. It gives you a step-by-step plan for getting out of debt and saving for the future. It works.

The thing to remember is that every financial decision we make has an opportunity cost. If you spend money on this, you cannot spend that same money on that. If you spend more than you make, you can't save for retirement or do other things you might want to do with that money. Make good financial choices and you'll find you can enjoy life much more.