The Gods cannot help those who do not seize opportunities. – Chinese Proverb
Are you missing chances to build your economic prosperity effortlessly? You are if you’re not practicing this Prosperity Principle!
The third of the Prosperity Thinkers’ 7 Principles of Prosperity is to MEASURE your opportunity costs. Once you learn to think prosperously and see the big picture of your personal economy, you can then measure where prosperity may be “leaking” out. Once you identify your money leaks you can then plug the holes! Measuring potentially lost opportunity costs will help you accelerate your prosperity with simple changes.
What do we mean by “opportunity cost”? Anything you can lose by spending money elsewhere. And here’s the key: not only have you lost the dollar, you’ve lost opportunity to invest that dollar for the rest of your life. So you’re not simply losing the dollar at “face value”; you’re also giving up the future dollars it could have earned you!
Here are five common places many people fail to measure their opportunity costs:
1. Your Lifestyle.
When billionaire investor Warren Buffett was offered a glass of expensive wine (brought by Malcolm Forbes) at a VIP birthday party for a friend, he told the waiter, “No thanks, I’ll take the cash.”
His sense of humor aside, Buffett’s frugal sensibilities are well-known. Living in the same middle-class neighborhood home for decades and even getting married in a simple civil ceremony at his daughter’s home, Buffett saw every dollar as a potential seed to grow more dollars. Many people could benefit from “living like a billionaire” with Buffett as their role model.
2. Your mortgage.
Perhaps you’ve gotten a 15-year mortgage, you’re trying to “pay a little each month” on your principle, or you’re following one of those bi-weekly payment plans to accelerate paying off your mortgage. Sounds great on the surface, right?
The problem with this philosophy may not be obvious until a financial advisor reveals the impact of lost opportunity costs with software that calculates the results. Since a home’s value increases (or decreases) at the same rate regardless of the mortgage balance, the money used to “pay down the principle” can usually be used more effectively elsewhere.
3. Insurance Premiums.
One reason we are fans of Whole Life insurance is that your premiums do not become “lost opportunity costs” at the end of day, but produce a return for you. In many instances, we also find that it makes sense to raise deductibles to lower your premiums on property and casualty insurance.
4. College Funds
Many parents start saving for their children’s college when they are very young, or even before they are born! However, a 529 plan can serve to “lock up” money that could be used elsewhere to accelerate your overall prosperity. We help our clients evaluate whether or not there might be better ways to utilize this money – and have even more when college rolls around.
5. 401k or IRA
In many situations (such as when you’re not receiving a “match” from your company), it doesn’t make financial sense to isolate a portion of your money and lose the opportunity to invest it elsewhere.
(There are additional reasons we don’t give the “traditional” advice too often heard in financial circles… stay tuned for future posts.)
The fact is, most “financial planning” is focused on retirement decades away. Our approach (Prosperity Economics™) develops a strategy for the future, but also looks and at how a person’s personal economy can be maximized right now. We do this by identifying where money is being “lost”.
Once you understand that concept of measuring opportunity costs, you will apply it to every financial decision you make. When you incorporate them, you can sometimes recover them… and get back the lost opportunity!
If we can help you get started, or you have any questions, we invite you to connect with us, or email us directly at email@example.com.