Despite the fact that I have the best roommates in the world, I’ll occasionally remark, “I’m tired of having roommates.”
And Will replies: “Are you $1,700 per month tired of it?”
I don’t need to respond. The answer is obvious. The minor inconveniences — sharing a refrigerator, waiting to use the washing machine — pale in comparison to the additional $20,400 per year that our roommates contribute to our mortgage. It’s a total no-brainer.
In the past two years of living with roommates, we’ve collected $40,800 — enough money to buy a rental house that provides a stream of income for the rest of our lives. (More on that below).
But before I get there, I want to clarify that this isn’t a post about living with roommates. It’s a post about an ever-important concept called opportunity cost, critical to anyone who wants to supercharge their wealth.
Yes, we could move into a one-bedroom apartment, and perhaps someday we might. But as long as we live in our three-bedroom unit, we face a trade-off: Will and I could either live solo, like a “normal” couple, OR we could accumulate an extra $20,400 per year without needing to lift a finger.
(And as someone who types on a laptop for a living, I mean “lift a finger” literally. I get paid to lift my fingers.)
Normalcy carries a massive opportunity cost.
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When we were in our early 20’s and fresh out of college, living with roommates was “normal.” But we’ve gotten older. Times have changed.
Will is almost 35, and I’m within spitting distance of my 31st birthday. We’re long past that collegiate stage of life, and over the years we’ve watched our friends escalate their lifestyles. Our friends now maintain vacant rooms — “guest rooms” — in their homes. They’ve purchased furniture, financed cars, bought diamonds.
Meanwhile, Will and I are the freaks who still live like college kids.
I can’t decide whether it’s ironic or fitting that we’re also the most financially stable. Zero debt, except the mortgages. Owners of five houses, two of which are paid-in-cash, and three of which are rapidly getting paid-off. Maxed out 401k, IRA, HSA. Huge emergency fund.
That’s not a coincidence.
To illustrate the awesome power of understanding opportunity cost, let’s check out a super-simple real-life example.
Here we go:
Income: Our two roommates each pay $850 per month, for a total of $1,700 monthly. (They also cover half the utilities, but they use half, so we’ll call that even.) That means two years of living with roommates creates $40,800 in income.
Investment: A few weeks ago, we purchased a rental property for $46,000 in cash.
Coincidence? Maybe not. (Thanks for buying us a house, roommies!)
Let’s forget EVERYTHING else that Will and I do to amp-up our savings. Let’s forget that I launched my own business a few years back, growing it from $0 to six figures. Let’s forget that I drive a used Honda Civic, eschew cable TV, wear the same clothes again and again. Forget ALL of that.
Look ONLY at the fact that we have roommates. Notice that this single decision alone brought forth enough income to buy a house in cash.
But wait — let’s take one more step (for the sake of over-doing it).
This rental house will command around $900 per month. Let’s say that half the rent will get gobbled up by operating expenses (taxes, insurance, vacancy, management, repairs, maintenance, bookkeeping, accounting). At this conservative estimate, this property will net $5,400 per year in passive cash flow.
Over the span of 40 years, this means we’ll earn $216,000 (in today’s dollars) — and that’s assuming we blow that money on champagne and caviar. If we re-invest that money, instead, it morphs into even more. The simple decision to have roommates for just two years could translate into $500,000+ over our lifetime. Wowza!
So let’s rephrase this question:
Imagine that a Magical Genie appeared before you, encircled by a haze of swirling mist and spicy perfume. (If it helps, picture the blue Genie from Aladdin.) After you recover from your initial shock, the Genie bequeaths you with a gift of $216,000. The only catch? You’ll need to spend two years living with two cool people. You can choose these people and continue living in your own home.
Would you accept that deal?
When You Make Decisions, Imagine the Aladdin Genie
It’s easy to focus on out-of-pocket costs. When you swipe your Visa, the price tag is unmistakable. But most people overlook opportunity cost — the hefty price tag that comes with each decision.
Every choice is a trade-off. And sometimes those trade-offs come at the cost of lowering our income, which shrinks our capacity to flex our investment muscle.
So whenever I make a decision, I like to imagine that a Genie is offering me “a gift with a catch.”
There’s a cloud-storage system called Dropbox that can backup and sync your photos and files. The first 2 GB are free, but you can snag 1,000 GB for $99 per year. Since I’m prone to frugality, I debated whether $99/year was worth the price.
Then I pictured the opportunity cost:
Imagine that I lost all my files and photos. The Genie appears before me, and says “For $99, you can have it back.” Would I take that offer? Of course.
In other words, I make decisions by imagining the cost of NOT getting that item — the opportunity cost, the missed chance. Sometimes, this results in refraining from a purchase. (Imagine that I wore an old pair of earrings to a conference. A Genie says, “you can wear different earrings.” Eh, boring. Still not interested.)
But other times, this makes the decision a no-brainer — like in the case of upgrading Dropbox, living with roommates for two extra years, or deciding to spend my surplus $46,000 on investments rather than crap.
(Yes, my investment analysis involves daydreaming about 1990’s cartoons.)
Objection, Your Honor!
I imagine that a few objections I’m going to hear include:
“But I can’t earn that much renting a room in my house! I only have one spare bedroom — and it would rent for $500, max.”
Work with what you’ve got. That’s $6,000 per year, enough to max out your IRA as of this year’s limits. In other words, that renter can buy your retirement.
Another way to view it: That’s $12,000 in two years, which is enough to pay cash for a car.
“But I value my privacy. I don’t want to live with a roommate.”
Do you $500+ per month value it?
That’s cool — as long as you’re deliberately deciding.
What’s the Afford Anything mantra? You can afford anything, but not everything. Every decision comes with a trade-off. You can either rent out your spare room, OR you can log extra hours on-the-job to earn the equivalent amount of money. Your life, your choice.
The key, though, is to avoid the deprivation trap: “In this economy, there’s absolutely no way to get ahead!”
Wrong-o. There are plenty of ways. Hundreds of ways. The paths you choose are up to you. Be deliberate. Be intentional. Accept the trade-offs. Don’t complain that you’ve run out of options.
“I already live in a one-bedroom.”
Awesome! If you want to live solo and frugal, downsizing is the way to go.
“I have kids.”
Will’s Dad had roommates who helped pay the mortgage, back when Will and his sister were in elementary and middle school. Why do you think Will is so enthusiastic about the idea?
By watching his Dad pay the mortgage via roommates, Will saw awesome role-modeling — frugal parenting through harnessing opportunity and working with what you’ve got. Plus, he got a chance to live with grown-ups from around the world, which broadened his horizons and turned him into the mature globetrotter he is today.
“This blog post is too long.”
Oh, fine. I’ll finish now. And as a parting thought, let me reiterate that this isn’t a post about living with roommates, per se. It’s a post about recognizing opportunity costs — and being deliberate about the trade-offs you’re willing to make. You can afford anything, but not everything, and every choice will impact your path, for better or worse.