Hey kids! Guess what…I have my first guest poster! Not poster like the one of Justin Timberlake I have on my wall (I kid…maybe), poster like one who posts…oh never mind, you get what I mean. Anyway, here is Vicki, a fellow blogger and tweeter who is in some small way my nerd soulmate. She tweeted me on the subject below and said I should write about it, so I offered to let her do my job for me. (I’m nice like that.) Without further ado…
It’s almost spring, which means it’s almost wedding season, which Jodi’s written about in the past (bear with me here until I get to the connection to economics that, sadly, has very little to do with XKCD or Wedding Crashers). Weddings today cost an average of $20,398, depending on the geographic location and a number of other factors that can totally make you want to make you stab yourself with a chafing dish. In addition to having to decide between buttercream or marzipan or rainbow skittles marshmallows ponies for your wedding cake, you also have to decide whether you want to spend the money on your wedding in the first place.
According to a recent article in the Wall Street Journal (hat tip: Jezebel), your $18,000 wedding today could cost at least $90,000 in the long-run because you could, theoretically, put the money into savings, which the very scientifically accurate figure below shows:
As the author of the article writes:
The biggest cost of every dollar you spend is invisible. It’s all the money you’d accumulate if you saved it instead. Over long periods, this cost dwarfs the mere sticker price, often by a factor of several times.
Which brings me to opportunity cost, or what you give up to get something else in exchange, or, there is no such thing as a free lunch. Usually, opportunity cost is framed in terms of money and time. For example, if you go to work for 8 hours a day, you make a certain amount of money, but you give up the time you would have been doing something else like playing air guitar or seeing if you can throw Corn Pops into your husband’s mouth from 5 feet away. You are making a tradeoff.
The same goes for the wedding money, but now we get into a special kind of time/money value trade off known as compounding interest. You can spend the $18,000 now. But in the future, that money is much more valuable because of the idea of compound interest and time value of money. There’s a couple ways to figure out how much your money now will be worth in the future if you sock it away. The most basic equation is this one, where Future Value=Present value*(1+the interest rate in percent) to the power
of n, which is the periods of time you plan to put it away for-can be months or years.
The article assumes the average woman is 26 when she gets married, giving her 40 years to accrue this interest on the $18,000 she socked away instead of getting a gorgeous Vera Wang dress. If she puts it away at 4% interest, she could make $86,400. It gets even more interesting if the, er, interest is compounded at different rates (every day, every minute, or constantly.)
But that brings us back to the question of opportunity cost. Would you rather have a wedding now, or a lot of money later? Maybe you really want a wedding, which is fine, as long as you are basing your decision on the correct tradeoff. The best way to solve this question is obviously to ask for money for your wedding so you don’t have to make the tradeoff in the first place.
Vicki Boykis blogs about how nerdy she was as an econ undergrad, her traumatic childhood as the child of Russian immigrants, and Nutella, on her personal blog.
1. Marzipan is disgusting. I think I am particularly put off by the fact that it is often shaped into strawberries and bananas and whatnot and yet tastes like none of those things. As a result, my mouth feels cheated.
2. People often (read, sometimes) think about this tradeoff when considering borrowing money to pay for a wedding, since it is clear in that case that they will be paying interest on the cost of the event. It’s important to remember that the opportunity tradeoff is still there even if you write one big check for your wedding. At least the foregone interest in the latter case is less than the credit card interest in the first case…
3. While it’s clear that Vicki has drunk quite a bit of the economist Kool-Aid, her words at the end suggest that she may, in fact, be a little human after all. She said it herself earlier- there’s no thing as a free lunch…so isn’t it the case that even if you ask for money for your wedding you still have an opportunity cost in that a. you could have squirreled the money away once it was in your hot little hands, or b. the gifts to pay for your wedding would probably make people less willing or able to give you money for other things? When we say no free lunches (or weddings), we really do mean it, as much as we would like to believe otherwise. 🙂