While we are diligently tracking spending during our Gap Year Adventure, there is one significant item we haven’t touched on yet: Opportunity Cost.
If you haven’t heard, my wife and I recently quit our jobs to road trip around the country full time. The amount of money left on the table by this new lifestyle change dwarfs the pre-trip and monthly expenses we’ve experienced so far. Not only is a steady income no longer covering our monthly expenses, but we are also missing out on contributing money towards investments.
Our goal of achieving financial independence will be delayed as we switch from saving money each month to spending down the cash buffer we built up for this trip. Luckily, our much more important goal of enjoying life both before and after FI appears to be significantly enhanced by this new adventure.
It was no small decision to walk away from our jobs at the young age of 27 and take this huge leap, but so far we haven’t regretted it for a second. Below, I’ll break down the decisions and math related to that big number in the title. It’s the amount that we gave up in order to make this epic road trip possible. Could you have made the same decision?
Switching From Accumulation to Spending
After our last paycheck arrived at the end of January, the “business” that is our lives switched from positive cash flow to running a deficit. Instead of padding our respective retirement and investment accounts on a monthly basis, we are now watching our checking and savings accounts dwindle every time we made a purchase.
We planned for this change ahead of time by saving up a cash buffer and thinking through multiple contingency plans, but it is still a large mental shift to transition from saving to spending.
Previously, we were setting a new “high score” in the excel sheet that tracks our net worth on a monthly basis (partially thanks to the recent bull market). Pending any unexpected changes in our investments, that number will likely drop most months that we remain traveling full time.
One thing that helps lessen the blow is the occasional positive entry in the bank account such as credit card rewards or a Google Adsense payment from this blog. Unfortunately, these are neither consistent nor large enough to cover our monthly expenses. Even the positive cash flow from our Seattle property (that recently obtained it’s first tenants!) won’t close that gap in a meaningful way.
An Alternate Universe Where We Still Worked
Let’s get back to what started this post: the opportunity cost of taking this year long road trip.
Opportunity cost is the benefit given up on one path by choosing an alternate path. For this example, I’m going to simplify the decision we made to a black and white choice with 2 options. In reality, there are a million shades of grey in between.
Our simplified choices for the year 2018:
- Both of us continue working full time and saving a high percentage of our income
- Both of us quit our jobs and travel around the country full time
By choosing either option, the benefits of the other become an opportunity cost.
In our case, by choosing to quit and travel, we give up the benefits of full time work. These include health insurance, some free snacks, and of course, money.
Let’s dive a little deeper into that financial opportunity cost.
The Million Dollar Math
While it’s impossible to know exactly how much we would have saved away in a hypothetical 2018 of full time work, we can use 2017 as a good approximation. Last year ended up being a very good year for income (given that some of it was stock based), but also included over 4 months of Becky not working, so I think it will do as an approximation.
In fact, I’m going to make the calculation more conservative by only using our savings from last year instead of our total net income. One interesting thing about living on the road is that we expect our expenses for the year will be lower than if we would have stayed put in Seattle (which has a fairly high cost of living). The jury is still out on if that will hold true, so I’ve decided to leave it out of this calculation entirely.
Plus, the bulk of the final tally is based on compound interest over many years which wouldn’t apply to the money that was earned and then spent immediately.
To be more precise, I will be calculating how much more money we would expect to have invested at traditional retirement age (65) if we worked in 2018 and saved the same amount that we managed to save in 2017, instead of traveling full time without jobs.
While I’m choosing not to reveal the exact amount we saved last year, it wouldn’t be hard to reverse engineer a minimum value if you were so inclined.
Once we have that savings number, we can multiply it by the expected annual investment return for every year between now and age 65. Over long periods of time, the market as a whole has grown ~7% on average. Our investments are almost entirely in broad market index funds and the time between now and age 65 is very long, so this is the growth value I will use. As we are both 27 right now, there are a little more than 37 years between now and our 65th birthdays.
Now that we have our three variables (savings, growth rate, and years), we can calculate our financial opportunity cost.
Opportunity Cost = Savings * (1 + Growth Rate)^Years
As you can probably guess, plugging in our own numbers results in a staggering opportunity cost of over 1 million dollars!
What Does It All Mean?
Opportunity cost can be tough to think about at times, especially in a case like this. The vast majority of the benefits we are getting by taking this road trip are non-financial, so how do we compare it to a number like $1,000,000? Especially when we consider that the million dollars wouldn’t materialize for some time.
When we first did this calculation last year (before choosing to quit our jobs), it was eye-opening to say the least. It led to conversations that I imagine are similar to deciding when to walk away from work after reaching financial independence, aka One More Year Syndrome. How do you compare and contrast an unknown future against a present opportunity to make more money?
Why quit when you reach 25x expenses (the 4% rule) if you can make your nest egg double extra super safe by working 1 (or 2) (or 3!) more years now? We experienced first hand why many people do choose to work a bit longer before pulling the trigger, even if we weren’t weighing the exact same decision ourselves.
In our case, we chose to look at it a little differently. We chose to treat it like borrowing money from our future selves in order to fund an opportunity to experience life to the fullest right now.
So the question then becomes: Would our 65-year-old selves be okay giving their 27-year-old counterparts a million dollars to take this Gap Year Adventure?
Given the cliche of older rich folks saying they would give up their fortunes to be young again, our bet is on yes. (Side note: Didn’t Warren Buffett say something to this effect at some point? I wasn’t able to find it after searching around for a while. If you do, let me know!)
We will never know for sure and it’s very hard to picture ourselves 37 years from now, especially since we haven’t even been alive that long yet! I imagine our goals, thoughts, ideas, and outlook on life will all shift as time goes on and we accumulate more knowledge and experience. What those shifts may look like is anyone’s guess.
Have you ever had to make a decision like this before? Would you be able to give up 7 figures worth of future money in order to start an adventure?
Let us know in the comments below!