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$90,000 Or A Piece Of Marzipan Cake? Opportunity Cost and Interest, Wedding Edition…

February 26th, 2010 · 23 Comments
Decision Making · Econ 101

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.

Editors notes:
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. 🙂

Tags: Decision Making · Econ 101

23 responses so far ↓

  • 1 Brian // Feb 26, 2010 at 5:41 pm

    But will interest rates ever come back up???

  • 2 David // Feb 26, 2010 at 6:44 pm

    Also consider that every other marriage ends in divorce. So on top of the wedding, you also get an expected cost of half the cost of a divorce – whatever that is. Plus, if you haven’t learned your lesson, a second wedding. The tax breaks just aren’t worth it. 😉

  • 3 econgirl // Feb 26, 2010 at 7:41 pm

    Email from Mom: “So, are economics and romanticism mutually exclusive? sigh……….. Granpa offered your dad and I cash. :-p I went for the dress, great chicken, and dancing to a string ensemble from the symphony.”

    My answers: yes, and I am very much my grandfather’s child, respectively. =P In fairness, my mom still talks about that damn chicken, so maybe there’s something to what she says.

    Kidding aside, the point isn’t really meant to be “weddings are terrible ideas.” I’m very much not in the business of making people’s decisions for them, and neither is Vicki for that matter, but I do stress that it’s important to understand the relevant tradeoffs properly in order to make the best decisions possible for yourselves. So if you want to give up $24,000 of retirement consumption for a poofy dress from Kleinfeld, so be it, I just ask that you actually know what you are giving up when you make these choices.

  • 4 Dan L // Feb 26, 2010 at 11:03 pm

    Does this post actually have anything to do with weddings? Every time you buy *anything*, including a pack of gum, you could have saved the money instead. When I look at a dollar in my pocket, I think of a dollar and what a dollar can buy, not the FV of the dollar and what it might buy in 40 years if I were to invest it. Must be because I’m not an economist.

    Fwiw, I suspect that most young couples do not pay for their own weddings.

  • 5 econgirl // Feb 27, 2010 at 12:26 am

    You are correct in that these tradeoffs always exist between consumption and saving, but I am guessing that the WSJ didn’t see an article about the true cost of a pack of gum to be quite as riveting.

    If I were to argue as to why weddings are particularly relevant in this context, I would say that they are an item where the tradeoff is more clearly of the form “consume versus save” rather than “consume X versus consume Y. ” This tradeoff exists even if young couples aren’t paying for their own weddings unless the wedding financers won’t let the couple put the funds into savings instead. Like I said, my grandfather offered her wedding or cash, but I don’t know if that is normal or not.

  • 6 Viktor // Feb 27, 2010 at 5:20 am

    Also note that it is only real interest that is interesting. (Interest above inflation).

  • 7 econgirl // Feb 27, 2010 at 2:26 pm

    And since I’m only interested in interest that is interesting (ok, I’ll stop now), I think I might have to write a follow up post on the topic. Or at least write something that will make the ads for the bedazzled wedding cake toppers go away. Yikes.

  • 8 tamara // Feb 27, 2010 at 5:18 pm

    A pack of gum cost less than a dollar but a big fat greek weeding costs a lot more… so the trade off is huge in comparison.
    When a young couple is thinking about a weeding they really should consider something like this;
    – maybe put down a payment for a house
    – travel and enjoy as a couple for a while
    – pay for accomodations if we have a house
    – maybe see how this relation works up
    Weedings are all about ilusion and a dreamy night “the best one of your life” and people want to have a huge event. But if you get married in an office at city hall or in a chappel in Vegas with Elvis as your witness is the same, you’re married. Which is your goal.
    I have never wanted to get marry and have the big weeding, and now that I’m studing economics I found out about this thing called opportunity cost and it feels better to have a small ceremony and buy some assets. Because I don’t like to use my savings to buy the family and friends a free lunch and drinks xD

  • 9 Elizabeth // Feb 27, 2010 at 7:17 pm

    I think that the main issue with this post is the fact that it does not discuss the emotional gains that the bride gets from the wedding. I think your point about your mother’s chicken is right on. She still remembers certain aspects of her wedding and to her those memories were worth the cost then and perhaps the FV as well.

  • 10 CC // Feb 28, 2010 at 8:45 pm

    I hate these calculations. Thankfully economists have worked out a way to deal with this nonsense: $18,000 today is worth exactly $18,000. Since most of us are making spending decisions today (and not in 2050) we discount the future. A better way to frame this is what in terms of today’s consumption would you be willing to give up. For example, my friend buys his fiance a 3CT engagement ring to which I respond “While it is very shiny — so is a new BMW”. When he asks where my BMW is — I say “Aha! and that is the time preference of money”.

  • 11 Nothing to see here, move along… | Vicki Boykis // Mar 1, 2010 at 6:55 am

    […] Nothing to see here, move along… Hello there! If you are new here, you might want to subscribe to the RSS feed for updates on this topic.Powered by WP Greet Box WordPress Plugin.. to my friend Jodi’s blog, where I am guest posting about the economic costs of weddings. […]

  • 12 Sophie // Mar 1, 2010 at 1:09 pm

    Did you know that in Israel, the standard wedding gift is, in fact, money? There is even a cute web calculator for figuring out how much you should pay. “Pay”, by the way, is the word we use these days to describe our financial duties towards the happy couple, and they themselves are very worried, are they going to “cover the wedding”.

    p.s. Marzipan is awsome and fantastic.

  • 13 Hannah @A Mother in Israel // Mar 1, 2010 at 1:56 pm

    I saw that article in the NYT, and I’m glad Vicki wrote about it, but I agree with Dan L. It’s just a creative way to attack fancy weddings.

  • 14 Mike // Mar 2, 2010 at 12:48 am

    I agree with David. Considering the reality of 50%+ of marriages ending in divorce (and in a far greater number than that the couple bringing each other primarily misery, cheating, cuckoldry, despair, resentment, etc. in the long run) weddings are a waste of resources. Unless your significant other is a foreign national, civil unions probably make more sense.

    However Elizabeth has the real scoop here, that (American?) women have been brainwashed to put nearly infinite value on meaningless things like shiny rocks and flying benjamins as proxies for real love. This is, of course, why the rich find it so easy to buy the attention of any woman they please, but it is also the reason why most women would not be fazed even if the NPV cost of their wedding were in the 7 figures.

  • 15 The Opportunity Costs of Marriage | Spousonomics // Nov 15, 2010 at 10:50 am

    […] Opportunity cost is what you give up to get something else. There was the Friday night, for example, I opted to have dinner with a friend, costing me the opportunity to have dinner with my husband. (I knew I’d see him the next day for Avatar in 3-D, and every day after for the rest of my life so I decided it was a cost I could afford to pay.) […]

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