As we kick off our series exploring the four challenges to building wealth, we’re taking a deep dive into lost opportunity cost. The choices we make every day affect our lives in far-reaching ways, from our diet and fitness routine to financial discipline. When you decide to do something you aren’t just choosing that option over others – you’re choosing its future over the others. How are your choices affecting your life and your future?
The Future Impact of a Dollar
When you decide to spend your hard-won money on something, you don’t just lose that dollar. You are effectively giving up any future potential that dollar had to gain interest or grow in value through saving and investing. It’s not the total balance that you’ve passed on though. An impulsive lunch out today could mean you don’t have the funds you need for a medical bill or car repair later.
It seems extreme, but many small choices add up to either financial freedom or a paycheck to paycheck lifestyle. Evaluate every dollar spent carefully; is the outcome of its use at this moment worth sacrificing its future?
Measuring Lost Opportunities
To help guide your financial decision-making, you can calculate the value of lost opportunity cost to help weigh your options. While pro/con lists are great tools for evaluation, the hard numbers and figures of opportunity cost help provide firmer metrics, something essential for financial decision-making.
To determine the cost of your lost opportunity: subtract the value of the choice you made from the most valuable choice. The remaining value is the lost opportunity cost. This assessment can be applied to choices throughout your life, especially those linked to personal finance.
Volatility in Investments
When evaluating investments, it is important that you account for volatility. As we’ve written extensively – market volatility can be disastrous for your returns. Two investments which have the same expected return are not equal – the least volatile one has less risk and, therefore, a lower opportunity cost. Assessing the risk of an investment is key to continued successes, especially when expected returns are similar.
Using Lost Opportunity Cost to Fix Personal Finance
An awareness and use of this economic principle can help you to solve some of your problematic behaviors holding back your financial health. Assessing the true, long-term costs of frivolous spending, high-interest credit card debt, and lackluster savings plans can be eye opening. Take the time to fully examine your financial life to determine whether you are willing to pay to cost of your lost opportunities. The clarity this will bring can improve your financial life and transform your world.
Nothing costs as much as a lost opportunity. It’s a heavy concept to grapple with, but taking extra time to be more thoughtful and direct in your financial decisions will truly change your life. This is also a skill that you can apply to all areas of your life, not just your financial accounts.
Ready to arm yourself with the knowledge needed to grow your wealth in an uncertain world? Join us at JB WealthFIT to learn the difference between thriving and surviving.