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The compounding cost
The math scales down. A $10 coffee, the kind with all the toppings, would have become $150 over 40 years at 7%, so buying it theoretically costs $150 four decades from now.
What spending returns
The other side is what the spending returns. A $10,000 car that lets someone drive to a job they could not otherwise do may carry a significant economic value over the long run. Enjoyment counts too, and money can be worth a lot today when it goes toward the right things.
The PERMA test
That is where the PERMA framework of positive emotion, engagement, relationships, meaning, and accomplishment comes in. A $12 iced coffee chugged on the rush to work every morning feeds none of those. The same coffee enjoyed slowly could bring some positive emotion.
Why do economists treat spending as a lost return?
The term opportunity cost was coined by the Austrian economist Friedrich von Wieser in the early 1900s. It values a choice by the best alternative given up, not just the price paid. Economists apply it to time, land, and money alike. In investing, the alternative is the return a sum would have earned elsewhere over the same years.
Where does the seven percent figure come from?
Wharton professor Jeremy Siegel traced US stock returns back to 1802 in his book Stocks for the Long Run. He found a return near 6.5 to 7 percent a year after inflation across that span. Returns in individual decades varied widely, with the 1970s losing ground after inflation and the 1990s running far above the average.
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