The $1,500 Haircut
This is the story of a $1,500 haircut. A friend of a friend loves getting her hair done. Cut, color, extensions - at a high-end salon - for the low, low price of $1,500. To me (and probably you), this is a staggering amount to spend on a haircut. Why would anyone do something like this? "Well, I can afford it, so why not?"
I can afford an entire semi-load of Hostess Oatmeal Creme Pies, but it doesn't mean I should. This is where so many of our financial decisions come off the rails. We often justify questionable decisions by saying we can afford them. Afford, on what grounds? In the classical sense, do I have enough money in my bank account to trade for xyz good? If so, technically, I can afford it.
However, we often underestimate the opportunity cost. Sure, I could buy an entire semi-load of Hostess Oatmeal Creme Pies (or a $1,500 haircut). Doing so probably wouldn't destroy my finances. But the better question is: "Is there something I'd rather do with this money?"
Every dollar we spend on something is one dollar we can't spend on something else. If I could talk to this woman with the glorious hair, I wouldn't ask her if she can afford the haircut. I'd ask her if there's something better she would do with that money. Everything is about the opportunity cost, including her haircut and my Oatmeal Creme Pies. There's nothing inherently wrong with her spending $1,500 on a haircut, but based on my coaching experience, I'm guessing there are areas of her life that are lacking.....frustratingly so. We humans have a way of sabotaging ourselves like this.
People tend to fall into one of two camps:
Person A: Do I have the money to buy this thing I want?
Person B: What is the best use of this money?
Both people might buy the same item, but the second person does the mental math to account for the opportunity cost. If we're wise, every decision is framed through the lens of opportunity cost. And, no, the goal of this mental exercise isn't to figure out which decision will create more monetary gain. This isn't about spending being bad and saving being good. Rather, this is about giving our decisions an honest look to determine how we can maximize our meaning, fulfillment, and impact. Sometimes, it means buying the cool thing. Sometimes, it means choosing a different option.
Perhaps you already do this. If so, you're far wiser than most. If not, today is a fantastic day to start looking at your decisions through the lens of opportunity cost. It changes our relationship with money, and it helps us focus on what's truly important to us.....even if it's a $1,500 haircut.
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