If you take a closer look at everything surrounding us, you will come to a mind-blowing, yet seemingly simple conclusion: at a high degree, all that happens in the macrocosm can be observed in the microcosm as well.
The same general governing rule of the Universe can be applied to the field of finances as well. At a large(r) level, OPEX and CAPEX rule the way business budgets are made — but if you narrow down the spectrum at which these are applied, you can make the most out of them when creating your own personal budget too.
How to use OPEX and CAPEX in personal finances? Read on and find out more.
First Things First: What Are OPEX and CAPEX?
We don’t want to make this a lesson in Economics and Finances, but defining the terms is mandatory before we proceed with diving deeper into the topic.
To keep things short and sweet, OPEX stands for “Operating Expenses,” which can be perceived as “ongoing” expenses that you incur on a regular basis, whereas CAPEX stands for “Capital Expenditures,” which are expenses you invest to make a profit in the future.
Easy-peasy, right? At a larger level, businesses need OPEX and CAPEX to function effectively and make sure that they use their budgets wisely (which, let’s face it, is a pretty good idea for pretty much anyone, business or individual, right?).
Examples of OPEX expenses for a business include the following:
- employee wages and benefits,
- equipment maintenance and depreciation,
- office rent or property taxes,
- …and so on.
Examples of CAPEX expenses for a business include the following:
- developing new products,
- …and so on.
At a small level, our mobile device is one of the best examples of how OPEX and CAPEX play in your life. You pay a fixed monthly fee to your service provider for using the phone, but when it comes to purchasing the device itself, you buy it once but enjoy its benefits for years.
OK, but how can you use this bit of information when managing personal finances?
OPEX vs APEX in Personal Finances
There are two ways in which you can use OPEX and CAPEX, and they don’t necessarily need to be mutually exclusive:
Use OPEX for Ongoing Costs
Ongoing costs are those expenses that you need to pay on a regular basis for necessary upkeep. Your smartphone service or your monthly rent on an apartment might fall into this category.
Use CAPEX for Profit-Making Opportunities
Profit-making opportunities are those expenses that you invest in to make a profit in the future. For example, you buy a piece of property in order to increase your net worth.
That’s the traditional way of looking at things, though — and for the largest part, it excludes a very important factor that goes into all kinds of spending, be them ongoing or not: our brains and the emotions that rule our lives.
The key to using OPEX and CAPEX to your advantage is thinking of CAPEX in terms of OPEX. In other words, your large investments should be thought of as smaller, regular payments — rather than a chunk of money you have to give out all at once.
Let’s take your car as an example. If your car costs $10,000, you will want to look at this expense through the lens of how much you have to spend on it every month. If you want to take out a loan for it and the total sum you have to pay back is, by a wild example, $12,000 to be repaid in five years (so 60 months), that means you will have to pay $200/ month for that car.
If you’d much rather save the money and buy the car later, you’d need to set aside $166.666 every month for a whole five years before you manage to buy that car (provided that, of course, the price would stay the same if you are keen on a particular model).
For the fun of it (yes, that’s how we have fun here at Simplr), let’s take avocados as an example. If your regular avocado is $1 and you buy them in packs of 3 (one pack per week), that means you spend $3/ week, respectively $156/ year on avocados. If, however, you’d buy them for $2 for a pack of seven, you’d end up saving money in an OPEX mindset.
You get the gist now: everything we buy is, in fact, an OPEX expense if you look at it closely.
The Downside with a Traditional OPEX/ CAPEX View
The biggest downfall of seeing the world of personal finances through the lens of a pure OPEX vs CAPEX mindset is precisely what we were mentioning at the beginning of the article, and that is: you basically miss out on a lot of amazing experiences AND you might not be taking into account how much you’re actually going to use your investments.
For instance, if you want to buy a vacation home and you’ll only be using it two weeks every year, it might not make sense to pay for it every month for the next thirty years. Likewise, if you don’t use your car that often, you might come to the conclusion that paying for it every month doesn’t make much financial sense to you.
Circling back to the idea of experience, investing in CAPEX might not always give you the best there is in terms of emotion and accumulating experience. For instance, if you visit the same vacation home every summer, you’ll miss out on all the other locations that could have pleased your soul and provided you with unforgettable memories.
The Access Economy: Where OPEX Meets Experience
There’s a solution to all this. When you stop measuring achievement, success, and happiness in terms of ownership, you unleash yourself from the burden of having to, well, buy stuff. It’s easier than it sounds, actually. With no ownership comes no responsibility of having to make recurring payments for a certain “something” for years or even decades — and thus, a new sense of freedom is formed.
The Access Economy makes financial sense too. For instance, if you want to buy a vacation home in Costa Rica and it costs $1,000,000 after interest, that means that you will have to make monthly payments of $8,300 for the next ten years. In that time, you will have spent a total of a maximum of ten months living in that home — so you’re literally spending nearly $100,000 for a month of using your vacation home every year. For that money, you could spend two months in five of the most luxurious locations around the world — just sayin’.
The same can be applied for smaller, much less expensive items. For instance, if you buy a drilling machine with $100 and you only use it once a year, it would make much more sense to simply rent it for $10 every time you need it.
The great part about all this?
Renting experiences and products is more than possible these days. And here at Simplr, we’re keen on making it all smooth for you