The formula
Future value = amount × (1 + rate)^years
Where it comes from
Opportunity cost is the value of the best alternative you give up. Spend a thousand you could have invested at seven per cent for twenty years and you have not spent a thousand: you have spent the nearly four thousand it would have become. This does not say spending is wrong — money is for using — it puts a number on the comparison, which is what almost never gets done.
How to work it out by hand
- Note the amount of the spend
- Choose the return that money would have earned invested
- Choose the horizon you are comparing against
- Multiply the amount by (1 + rate) to the power of the years
What is worth knowing
Two warnings so this does not become a stick to beat yourself with. First: the return you enter is an assumption, and at seven per cent over thirty years any purchase looks reckless. Second: the figure is in future money, not today's, so to compare it against your current purchasing power you have to strip out inflation by using the real return instead of the nominal one.