The Biggest Missing Piece In Personal Finance – Episode 318

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[00:01] Welcome to the Prosperity Podcast. On today’s episode of the Prosperity Podcast, we’re going to talk about the biggest missing piece in personal finance. Is that the way to say it, Kim? It is. Can I let it out of the bag? Let’s hear it. It’s called opportunity cost. And it’s something that you learned in high school or college economics and possibly also in accounting. And before you roll your eyes, let me help you understand that I didn’t like those classes either, number one. Number two, I did not learn about opportunity cost until I was five years into the personal finance industry on top of three years out of college at a bank. So we’re talking eight years after college. I finally learned the massive impact that opportunity cost has

[00:58] on our personal financial decisions. Do you remember the moment when it clicked for you? And if you do, I would love to hear it. Yes. The reason that I do is because it was when my husband now, who was at the time basically a computer person in the back of a dark room because we were all there training. And this is like, I think in 1994. And so in order to see our computer screens, we had to have the lights down because computers weren’t very good then. And up at the front of the room is this what I would have considered ancient gentleman who is talking us through a calculator that Todd Langford had programmed. So Todd is sitting in the back typing live into this calculator. And I saw it before my very eyes. And I don’t

[01:58] even know if I remember the term prior to that, but did or not, it didn’t have an impact. But when I saw it numerically, I saw it proven. I saw that opportunity costs were not fuzzy math or soft money or anything else that is a legitimate perspective, but wrong. I was blown away. Okay. Now what was it? Was it an opportunity cost with mortgage or was it an investment or what just smacked you in the face? It was with an investment. So the backstory is that I had been trained as a typical financial planner and used a lot of mutual funds with an asset under management fee. It was sometimes called something different back then, but basically in today’s world, it’s the one to 2% that is charged against your mutual

[02:51] funds, whether they’re in an IRA or not is not relevant, but it’s charged against your mutual funds and sometimes your stocks and bonds as well. And what happens is that not only are you charged the one, let’s just use 1% as an average, but you, so that money is gone, right? You’ve given that money to the money manager, but you now have what’s called an opportunity cost. Some people call it a lost opportunity cost of those dollars for literally the rest of your life. So it works like this. If you have a hundred thousand account and the charge is a thousand dollars in year one, because you’re going to measure this over say 30 years, you’ve lost the thousand dollars that was the fee, but you’ve also lost

[03:41] the opportunity for that money to earn money for the next 29 years. Well, then in your second year, you’ve lost the thousand plus the opportunity for that money to earn money for 28 years. And in your third year for then 27 years and on and on and on. And like I said, when you see it on a calculator, it is ugly with a capital. Yes, it is. So I’m going to interject and I’m going to tell you where I first really had this sink in and you’re going to laugh. It was a couple of years ago and it was at a Truth Concepts training. And I was also sitting in the back of the room and I was watching this calculator and I thought, because I’ve owned several businesses, I’ve owned lots of real estate. I thought I had been decently smart over the years and he plugs in opportunity cost

[04:37] and he first did it with the automobiles. And that’s when it smacked me because I had gone this route of, yeah, I pay cash for all of our vehicles. And I saw it and I went, whoa, that is so bad. I am losing out on so much because of the opportunity cost and then flipped over to mortgages. And I about fainted and it really hit me so hard to see that all of this money that I was putting into something that I thought was safe or something that many people older generations have said to do was costing me so much opportunity in the future. And it just woke me up. And it’s that same gentleman that has now moved from the back of the room behind the computer to the front of the room where he tells stories using the calculators to prove the numerical concepts. And it makes a crystal

[05:37] clear, doesn’t it? Absolutely it does. And it was shocking because no one fully talks about it. Yes, they’ll mention opportunity cost from a technical term, but not in a term that you can actually tangibly understand the way he does. I agree. And I think most typical financial advisors don’t mention it at all because it’s just not something that we’re taught. I went through the entire personal financial class, which was a two-year program at the time. If it was mentioned that I didn’t remember it, I went through all kinds of licensing. If it was mentioned, I didn’t remember it. So how are our clients supposed to remember it if we don’t help them understand it in a very relevant way? And you mentioned

[06:22] mortgages earlier. Oh my gosh, it took me a year of going over and over and over the calculators probably longer before I finally understand opportunity costs around mortgages. Like you said, it’s around cards, personal fees, or I should say financial fees on personal accounts like mutual funds and that kind of thing. It’s in almost every financial decision that we make. Absolutely. So I think for our listeners, it might be good to take an inventory. So if you have put a lot of your cash or capital into be it real estate, if you put it into your business, if you’ve put it into investments where there are a lot of fees, as you mentioned earlier, it may be a good time now to take inventory and figure out

[07:09] what you can do to gain control over that. Now, I will personally, I’m saying this isn’t an episode where we’re saying to leverage everything and to find a way to make your life more risky or anything like that. What we’re trying to do is take a full account. So opportunity cost is in the equation. Is that a good way to say it? It really is. And when you look at our principles of prosperity, we talk about the importance of measuring it. And so for those of you that are analytical, if you’re wanting to figure out how to measure opportunity cost, you can start with the rate of return that the account that you’re dealing with is earning. So if it’s a mortgage and it’s 4%, then you measure opportunity cost at 4%. If it’s a mutual fund account and it’s

[08:05] averaging 6%, we won’t get into how inaccurate averages are for today’s discussion, then measure it at 6%. And yet, so many people don’t really even understand the importance of measuring it. And you essentially want to measure it based on the rate of return that is available to you as investments, as an investment rate of return. But I think easier when you’re first learning is to just use whatever rate of return the account that you’re talking about is earning. Okay. And I think also if you have specific questions, just email those to hello at partnersforprosperity.com. And for some of the more analytical or just inquisitive listeners out there, you can go to truthconcepts.com. And Todd has a lot of different information on the website and

[09:03] there’s calculators that you can use. We even have people that aren’t financial advisors or anyone in the industry that’s going through and using these calculators for their real estate brokerages or even their personal use. Haven’t you seen that too? Absolutely. It is intuitive enough software that somebody can grab it and at least at the basic levels do the work that they need to do. I think also what people will benefit from is Todd’s YouTube channel where there are actual videos of him going over some of the really critical ones. And we’ll include in the show notes the specific one about cars that you identified. Perfect. All right, listeners. Well, thank you for listening to this episode about opportunity cost. And hopefully you’ll be able

[09:50] to see ways that you can optimize the capital that you currently have. And you don’t have to take eight years, 10 years or 20 years and look in the rear view mirror and say, oh, I wish I had that time back to make a better decision for the future. So thank you for spending time with us on the podcast today. Thank you for listening to the Prosperity Podcast. To take control of your money and have it work for you, visit us at partnersforprosperity.com. If you liked this episode, make sure you subscribe and leave a review.