I’ve never bought fireworks in my life. Where I grew up they were illegal (although that seemed to deter few people) and my dad would never allow it. Yesterday, my son bought fireworks for the first time in his short life. I guess I’m less of a hard ass than my dad. My only stipulation was that he had to spend his own money and that an adult had to be present when he lit them.
I am fundamentally opposed to buying fireworks. I don’t oppose other people buying them, mind you. In fact, I need other people to buy them. I can sit in my driveway and watch thousands of dollars of other people’s money go up in smoke, get just as much entertainment as if I’d bought them, and not spend a penny. Did I mention I’m an accountant?
The boy spent $35.34 on fireworks this year. Had he invested that money in an index fund that returns 10% over time, he would have $8,084.43 when he’s 65.
If he continues to buy fireworks until he retires, and the cost or quantity of fireworks he buys is 5% more than the previous year, he will have spent $11,271.88. If he invested that money instead, he would have $165,930.57.
He thoroughly enjoyed lighting his fireworks, but I don’t know if was $166,000 worth of fun.
21 thoughts on “The Opportunity Cost of Fireworks”
I agree with the principle, but don’t forget inflation, taxes on earnings and the fact that assuming a 10% return is optimistic :-)
Good example of how we can benefit greatly from controlling spending and the time value of money.
Try looking at it this way:
What if you took the money you spend to play at a golf course and invested it into a fund for your son? If you skipped 18 holes of golf once this year (assume $50 to play, no inflation, exclude cost of golf balls, beer, cart rental, etc.), and invested into a fund with 10% return annually, then at age 65 your son would have:
I know you like to play golf, but is one round of golf this year really worth $11,438?
Does this logic also apply to a box of donuts? I think his fireworks are a healthier investment.
The $166,000 of fun you could have at age 65 is probably not as exciting as $35 of explosive fun at age 8!!!
An analysis is not necessarily useful just because it is possible. I work with a few folks who optimize their retirement strategies and maximize all their pennies. The exercise is interesting, but leads to the rough question, “What day do you plan on dying?”
Money should be spent on things that you enjoy while you are able to enjoy them.
When he’s 65, $8k won’t even buy him a piece of chewing gum. Let him blow things up while he can.
If he had tried to invest that $35 today it would’ve cost him $40 minimum to setup the account and pay the transaction fee, leaving him $5 in the hole.
Another way to look at it is that it’s a $35 investment in a promising career as a pyrotechnician. You got something against a boy getting an education??
So he has $166,000 at age 65 so he can buy fireworks then. Reminds me of the story of the island fisherman and the investment banker.
Definitely an accountant approach, in economics we realise people can have fun and obtain pleasure from their activities that outweighs future earnings (opportunity cost) and if we use the principle of discounting (i.e. people prefer to consume now rather than latter).
So let’s discount the $165,882.53 worth of funds to today’s value
Discount value = 0.004371 = (1+10%)^57 (using same 10% and 57 years time)
So its only $725.13( = $165,882.53* 0.004371) in today’s terms. I sure your son got at least half of that value and the free riders (i.e. those that just watch) received a benefit as well.
But with proper cost benefit analysis the price of future expenditure does not increase, then the total outlay over 57 years is only $2,049.72 and if that is discounted to today’s value then its only $8.96.
I sure he got that your son got well over $9 worth of value of enjoyment blowing up his future earnings!
damn that $2000 should have been $351 today’s terms. But principle stands
Good demonstration of Future Value.
We could also get a medical insurance calculation factored in using a relevant indexation rate + an XNPV() of the value of future costs.
However if the fireworks were free would you still want the kid playing with them? And is the equation much more simple?
In which case why ever buy a car for recreational purposes? The cost of maintenance, tax, insurance, risk of injury and annual devaluation are all much more serious than fireworks.
And did I say “KABOOOOM !!”
All you outlined was the monetary opportunity cost. If the enjoyment of setting off his own fireworks helps your son live to 65, and if the lack of such enjoyment reduced his life expectancy, would his purchasing the fireworks be worth it?
What about if he invested the money and the stock crashed – stocks like fireworks go up and down!!!
Nice that you son can still have some fun even with a mean bean counting old father like you Dick “Messier”, Kusleika, :-)))
Live is about living, playing, loving, and not only collecting cash and saving it.
He’ll put an eye out.
I’m sure that if he’s still here in 60 years from now the $160k will fall out of one of his pockets if he coughs.
We work to live, not live to work. Cease the day and hope tomorrow will be even better :-)
“Desino Diem !”
We can tell you are an accountant… if you were an actuary you would discount the value by the probability of dying before age 65. I knew actuaries were more fun!
Actually chemical engineers have all the fun. Damn.
Don’t they say, “Definition of an accountant: a man who knows the cost of everything, and the value of nothing”?
A depressing analysis at its worst. What on earth could match the smile on a child’s face and the pleasure parents get seeing their children happy.
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