on RICH FOR LIFE

November 05, 2009

the price behind the price tag

In any purchase I make especially purchases that would require me to shell out more than P10,000 pesos, one of the things I ask is WHAT WOULD BE THE OPPORTUNITY COST of this purchase.

During the 90’s my dad purchased a VOLVO CAR, his dream car. The car cost around 1 million pesos. A huge amount for a car in the 90’s. There was nothing wrong with his purchase. He could afford it but it would have been wiser if he had asked the opportunity cost of the car first before buying it. What do I mean? He had 2 options with his 1 million pesos.

volvo_850

Option 1: Buy the car.

Option 2: Invest it in a mutual fund that would earn at least 10% per annum. What would have happened to his 1 million.

3 weeks ago I got a call from my dad telling me to help him sell his VOLVO car. I said how much? He said P250,000. Option 1: WOW, in ten years time the 1 million pesos depreciated in value. P750,000 less of its value. Option 2: If my dad put his 1 million in a mutual fund that earns more or less 10% per annum compounded annually he would have had 2.5 + million pesos. An increased value of more than 140 -150% in 10 years time.

So before purchasing anything, ask what would be the opportunity cost of this purchase and THINK HARD!

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