Am I serious?  I most definitely am.

Let me show you bt way of an example.  I have just moved in to my new house.  There are many rooms in the house and I have this wild idea that I want a 50” plasma TV in every room.  This is 10 plasma screens!

Now I have 3 options:

1. buy cash.  This will cost me £7,000 from Richer Sounds.
2. Borrow £7,000 from my local bank and buy them from Richer Sounds.
3. Get a store card with a £8,500 limit and buy them at £850 x 10 from Argos.

Now which one do you think is the best option?  Well its what will cost me the least based on the cost AND the opportunity cost.

Opportunity is the forgone gain from spending your money now and what you could have done with it.  So lets look at each example.

Now I get a 766% return on my cash over a 5 year period.  This is worked out by:

Every £15,000 invested turns in to £115,000.  This is because I would buy a property for £100,000 by putting down £15,000 and it would double in 5 years to £200,000.  This means my £15,000 has turned in to £115,000 equity.

This is a 766% return.

So from £7,000 this could be turned in to 766% x £7,000 = £53,620.

So each of the options the cost would be as follows:

1. buying cash for £7000 would be the worst thing you could do!  It would mean you will miss out on the opportunity to make £53,620 as proved above.
2. This would be the second worst.  If you find some bank to lend you £7,000 cash then invest it!  It will mean you will make £53,620 - £7,000 = £46,320.
3. This will be the best method if you can get the credit.  It will mean you will make £53,620 less the interest payments say £4,000 over the 4 years.  So in total you will make around £50,000.

So before you go on a shopping spree, think about the lost opportunity.  If you hate shopping (like me!) then this really will put you off until you have a large wedge in your pocket so it doesn’t really matter!

Hope this helps.

Ajay

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Posted on: 28th May 2008