We're heading towards the end of another year and perhaps you're considering buying yourself some sort of gift to reward yourself for seeing through a tough year. Maybe you've recovered from something, launched a new business or landed a new role or promotion.
The end result is you've decided you deserve a reward – which is what so many of us do as we head towards the silly season. Your reward might be a Prada handbag, an overseas trip or a new toy. The bottom line is that you want to spend some hard-earned cash on yourself for a job well done.
![A spa treatment won't set you back as much as buying a Prada handbag.](/web/20170120092040im_/http://www.smh.com.au/content/dam/images/g/s/y/y/w/4/image.related.articleLeadwide.620x349.gsyyso.png/1480385429070.jpg)
I'm not going to suggest that rewarding your own effort is a bad thing. It's important to celebrate milestones. But I also believe it's necessary to understand the true cost of the pat you're giving yourself on the back.
Every decision has an opportunity cost. You might think of it as simply acknowledging that a boozy night out brings the consequence of a morning lost nursing a hangover. It doesn't mean you regret celebrating a night out with friends but if you were going to miss an important meeting the next morning then you might change your behaviour – perhaps limit your drinks and leave a few hours earlier. The same is true for your finances. If we're going to buy ourselves a reward, we need to understand and acknowledge the unintended consequences that giving ourselves a reward might bring. It's a big step towards becoming conscious consumers and making informed choices.
So if you're tempted to reward yourself this year with a big fat gift, what opportunity cost should you be aware of?
1. Rewarding yourself with cash you've saved is great but it's problematic if you pop the reward onto a credit card and then only pay the minimum amount as repayment. That's because the $5000 present you bought yourself may cost you an unexpected extra $12,181 in interest and you'll still have the debt some 33 years later. Even if you knuckle down and pay the amount off over two years, you'll still pay an extra $902 in interest on an average card. For a reward that will soon become a memory or depreciate in value, that doesn't really make great financial sense.
2. Even worse is the opportunity cost of what you could have saved during the time that you were making those credit card repayments. If you transferred the minimum repayments you made on the credit card into a bank account earning 2 per cent interest you'd save $24,090 over 33 years or $6019 on the minimum repayments made in two years. Now a bank account with almost $25,000 versus a credit card with a nil balance and nothing to show for it decades later seems like a bit of a no-brainer to me.
3. Of course you might thumb your nose at a 2 per cent interest rate so if you looked for a higher return your opportunity cost might soar too. Instead of buying something tangible you might reward yourself with an investment. Whether you bought the bank rather than put your money in an account by purchasing bank shares, purchased an index fund, popped your money into an ethical fund or more, you would potentially see your opportunity cost double. Or you might reward yourself with only half the amount, invest the balance and you can still enjoy a treat while looking after your future self. It's important to understand your risk profile and your longer term goals before making an investment but it's certainly worth considering an alternative to cash in the bank.
4. If we have cash sitting in a bank account, we might think we can do what we want, but it's important to understand your goals, priorities and values. If you want to start a business in 2017 and you've decided you need a buffer of $10,000 to do it and you have that in a bank account, grabbing half to reward yourself is really only hurting you and delaying your dreams. That's when it's time to look at yourself honestly and ask if your slightly longer-term goal is worth more than your short-term gratification. This might mean trading the Prada bag for an afternoon spa session to keep your savings intact so your business can start on schedule.
Advertisers want us to believe we're worth it and we should be spending money on ourselves and enjoying today. Certainly, I'm not suggesting that you're not and that you shouldn't. For me, the reward is almost always shoes and day spas. But it's important to understand the real cost of rewarding yourself at the end of a tough year so you can enjoy the experience fully rather than feeling guilt-ridden if you've decided to go for it. Or to applaud yourself for your restraint if you've decided not to. Because you're worth it.
Melissa Browne is CEO of accounting firm A&TA; and author of Fabulous but Broke.