Is LASIK surgery worth the cost? Or am I better off buying contacts and glasses for the rest of my life?
Ok. Maybe you don’t wear contacts. Maybe you don’t care.
Because there are two reasons why this question matters to you.
- You can apply this exact problem-solving to other financial questions in your life.
- The math used here is essential in understanding why stocks have value.
Let’s dive in.
The Cost of Lasik
“LASIK” is a laser refractive surgery used to correct vision problems. Surgeons use a precise cutting laser to change the shape of your cornea in order to permanently improve your vision.
The average cost of LASIK in 2021 is $2246 per eye, or $4492 total.
That’s a one-time cost.
But with contacts and glasses, I’ll be spending money for the rest of my life.
How do I account for that?
The Cost of Contacts and Glasses
- I spend $300 on contacts per year
- I spend $200 on glasses every other year
On average, I spend $400 per year on these products.
If I live another 50 years (age 81), I’ll spend ~$20,000 (50 years * $400/year) on these products.
So it’s an easy choice. $4492 for LASIK is WAY less than $20,000 for contacts.
But there’s a problem…
Future Dollars vs. Current Dollars
I pay for LASIK fully in 2021. But my contact/glasses costs are spread over 50 years.
That’s a problem. My simple analysis above doesn’t account for that.
You probably have a basic understanding that a dollar’s value changes over time. $100 in 1970 is NOT the same as $100 today.
So – how do we compare the future value of contact/glasses costs vs. the present value of LASIK costs?
Future Value of Contacts vs. Present Value of LASIK
One of the basic tenets of financial analysis is differentiating future value (FV) from present value (PV).
The PV of LASIK is easy and understood. It’s $4492.
But what’s the PV of the contacts? We don’t know. All we know is the FV of the annual contacts expenditures.
Converting FV to PV
How can we convert FV to PV? We need to answer two important questions.
- How will contacts/glasses costs change over time?
- How much money would I need today to pay for contacts/glasses in the future?
For #1, I’m going to look at inflation. Eyewear has experienced ~2% annual inflation over the past 35 years. Let’s assume that trend continues into the future.
If I pay $400 for eyewear in 2021, that same bill in 2031 will be approximately $488.
The math: $400 * [(1.02 per year) ^ (10 years)]= 400 * 1.219 = $488
If I need $488 in 2031, how much money would I need today?
To answer, we need to implement a process is called discounting. We need to discount the future value into today’s dollars.
Trivia: what’s the earliest known example of discounting?
Answer: “a bird in the hand is worth two in the bush.” -Aesop
He said the FV of two eggs is equal to the PV of one bird.
What Discount Rate Should We Use?
What sort of rate, or percentage, should we use to discount FV to PV? In big investing decisions, billions of dollars can be made (or lost) by using the right (or wrong) discount rate.
Small problems and small investors typically use the rate of return of the “next-best investment,” a.k.a their “opportunity cost,” as their discount rate.
[If you’re curious, large investors/companies often use their cost of capital as their discount rate]
What’s my opportunity cost? If I’m not buying LASIK surgery today, what’s my “next-best investment?” It’s probably a diversified index fund.
What’s the average rate of return of a diversified index fund? Historically, stock index funds have provided an average rate of return of ~10%.
Let’s tie it all together. The problem now becomes, “How much money do I need to invest today in order to have $488 in 2031, assuming 10% annual growth.”
Answer: about $188.
Math: $488 / (1.10 ^ 10) = $488/2.59 = $188
The present value of my 2031 contacts/glasses is about $188.
Next, I need to repeat that process for all future years. What’s the PV of my 2022 contacts/glasses? How about for 2023? 2024? …All the way until 2070.
This is easily done with a spreadsheet. Here’s my Google sheet if you want to check out my work.
What’s the Answer?! Is LASIK Worth the Cost?
If I assume I live until age 80, and assume I continue wearing contacts and glasses as I am today, then the present value of all my future contacts/glasses is:
Whereas the present value of LASIK surgery is $4492.
LASIK is cheaper by about $900. LASIK, therefore, is worth the cost.
Aside: the Importance of the Discount Rate
Remember when I said, “billions of dollars can be made (or lost) by using the right (or wrong) discount rate.”
If I had assumed an 8% discount rate, then the PV of my contacts would be ~$6786. That’s even more in favor of LASIK.
But if I had assumed a 12% discount rate, then the PV of my contacts would be $4438—about the same as my LASIK. Suddenly, my optometry choice becomes much harder.
Big decisions in financial markets are made based on PV and FV calculations. The discount rate makes all the difference.
Ok. What Does This Have to Do With Stocks?
Question: why does a stock have value? Great question, Jesse.
A stock is partial ownership of a company, and a company has value for two reasons.
- The stuff that the company owns. Trucks, factories, conveyor belts, intellectual property, etc. As a stock holder, you own a fraction of that stuff. And it has value!
- The future profits of that company – from today until kingdom come! Those future profits have a value today. Do you see where I’m going with this?
#1 is easy to understand. Add up all the stuff, figure out what percentage you own, and voila.
But #2 is hard. How do we find today’s stock price when we’re depending on future profits?
Answer: we use discounting!
We have to make some assumptions. And the assumptions are where the real money is made or lost. A stock analyst needs to ask:
- How will the company’s profits change over time? (this is similar to our inflation question for contacts/glasses)
- What rate should we use to discount future earnings? (this is just like our PV/FV question for contacts/glasses)
You can find the value of a stock with the same math and logic used to make our LASIK vs. contacts decision.
Who knew blurry vision could help you learn about stocks?!
Attentive readers might ask, “But isn’t LASIK potentially risk? What if there’s a complication? There’s a cost to that, right?”
It’s a fair point. Everything has potential complications. Economists call these “hidden costs.”
- There’s a cost to fiddling with glasses and/or contacts every day.
- There’s a cost to stumbling out of the bed with blurry vision.
- There’s a cost to sticking my potentially-grubby fingers into my eye to place/remove contacts
- There’s a cost to contacts drying out/falling out when I don’t want them to
- There’s a cost to getting hit in the glasses, possibly damaging them and/or injuring my face.
Hidden costs are everywhere.
Are the hidden costs of LASIK worth eliminating the hidden costs of glasses and contacts?
I don’t know. What do you think?
I Can See Clearly Now…
I’ll tell ya – this analysis has me seriously considering LASIK surgery in the next few years.
And even if you don’t care about LASIK, you could apply similar logic to…
- The cost of a dishwasher vs. the future time savings
- The extra upfront cost of a Tesla vs. the future savings on fuel and maintenance
- The extra cost of a “new” house vs. the future renovation costs when buying a “fixer-upper”
You can use FV and PV in your life.
Plus, you now know a little bit more about stocks.