Ghostly Profits, Opportunity Costs, and Inflation

Golden Ghosts
The ghosts should make me around 141% return on investment. I went against my own advice from a previous post, and made an investment in Halloween decorations. The positives and negatives I discussed still apply BUT I ran across an opportunity to buy at a 75% discount to the market price. How could I pass it up?

Halloween Profits
I spent $121.25 for decorations that normally go for $485. Based on the formula I use to price all my eBay investments, I should net around $171.41 when they are sold. Even if I was 20% high in my estimates, I’ll still net $84.99, about a 70% return on investment.

Sitting On Cash
You don’t care about how well ghosts will sell on eBay, but what you should care about is the brief thought I had while making this investment. Typically, I expect to sell my eBay investments 1 day – 3 months after buying them. Obviously the price for this investment was discounted so heavily because Halloween products are a cyclical item and I bought at the end of the cycle. (Too bad all cycles aren’t as easy to predict as “always buy on November 1st”). Which means I don’t expect these items to sell until about a year from now.

Time Value of Money
So now I have $121.25 worth of stuff sitting on a shelf for a year with inflation and opportunity costs eating away at the value of my investment. The important thought I referenced earlier is as follows. “If I’m investing this money now and won’t see any return on it for a year, would it be better invested in another way?”

The reason this is so important is that opportunity costs and inflation are so easy for us to overlook when making financial decisions. Investopedia has a good illustrative article that explains how the time value of money can affect our pocket book based on different decisions we make. The decision for me was easy, had I bought shares of stock or a mutual fund I might have expected a gain of 5 – 15% over the next 12 months. Compared with a 70 – 140% return on investment the choice was simple.

Tax Time
“But I don’t sell things on eBay or invest in stocks”, you say. It doesn’t matter; this principle still applies to you. A Kiplinger Personal Finance article tells us that “the average taxpayer is having nearly $185 too much withheld from his or her pay every month.” That comes out to $2,220 a year you don’t have working for you. While the government is holding onto your money, missed interest income and inflation are eating away at the value of the dollar you worked so hard to earn!

The Point
So what am I saying?

That you should reduce your withholding if you’re withholding too much tax?
YES!

That you should invest your money?
YES! Whether it’s selling on eBay or investing in stocks, make your money work for you.

That you should be aware of the impact that inflation and opportunity cost have on your financial decisions?
YES!

That doing these things will help you live a Money Smart Life?
YES!

Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

All posts by Ben Edwards