wealth building

The Four Challenges to Building Wealth: Lost Opportunity Cost

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.

Wrap Up

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.

The Four Challenges to Building Wealth

If you’ve set up automated deposits, selected an investment mix, and have a general awareness of your overall financial status, you’re doing well. This is especially true when you consider the huge number of Americans who have under $500 in savings and don’t track their spending.

Unfortunately, there’s a lot more to growing your wealth than setting up these healthy behaviors. In fact, there are four distinct challenges to building your wealth and overall financial wellness. We’ll take deep dives into each of these factors in the coming weeks to help arm you against these threats to your wealth building strategies. Today we’re offering up a preview of the posts to follow as part of our four part educational series. We’re hoping you tune in and learn along with us each week.

The very real threats staring down your personal wealth include:

Lost Opportunity Cost

You might think that if you spend one dollar, you’ve effectively lost one dollar, right? Sadly, it’s not that simple. If a situation arises that requires you spend money you would normally save or invest, you’ve lost more than just that amount of money- you’ve given up what that dollar could do for you in the future.

Whether this spending comes from unexpected bills (like medical expenses or emergency car repairs) or from impulse spending (we all remember Cyber Monday), the outcome is the same: you’ve traded the future growth potential of that dollar for the use of it right now. In our deep dive, we’ll look further into how to measure lost opportunity cost, the role of volatility in assessing it, and how to use these measurements to make decisions about your finances and life.

Rules of Financial Institutions

When is the last time you read your bank or credit union’s service agreement? Do you know the steps to take if you want to close your current checking account and open one elsewhere? There’s a reason why the fine print is small and difficult to discern; hidden within service agreements and fine print are many policies that make your money work harder for the institution than it does for you. It can be difficult to disconnect from your current bank’s ecosystem. They want to ensure that while your savings account earns 0.01% interest annually they can loan your funds to a credit card user and charge them 27% APR.

In our examination of financial institutions’ rules, we’ll reveal how they make it difficult to use your money, how to find a more beneficial partner, and ways you can use banks’ approach to finance to guide your own wealth management strategies.

The Velocity of Money

Velocity is the speed of something in a given direction. While “the velocity of money” is typically used by economists studying the GNPs of different countries, it also applies to your personal finance. In this setting, it means how you get your money to do more than one thing for yourself at the same time. Whether this means opening a higher-yield savings account to hold your quarterly payments for freelancer income taxes or refinancing your mortgage to remove a PMI and expedite your amortization rate, figuring out a way to make your finances work harder and faster is key to your financial health.

In our dedicated blog post we’ll further explore the velocity of money, its potential impact on your financial wellness, and ways you can adopt financial institutions’ strategies to make your money work harder.

Financial Organization and Coordination

You can’t build what you don’t know. It’s not enough to be aware of your finances – you have to aggressively coordinate and organize your money so that it moves and grows in a productive manner. This topic is one of the largest stumbling blocks for the general public – our financial systems mean ignorance is bliss for many. But taking time to organize your money and enact a strong plan will empower you and remove a lot of the stress associated with personal finance.

We’ll look into ways to organize your funds, why you should treat your household’s finances like a business, and how to get over the initial fear and pain that comes from discovering where your money may have gone wrong.

Wrap Up

The short story? These are in no way simple challenges to tackle. But taking the steps to empower yourself through this learning will put you on the path to building your wealth and improving your overall financial wellness.

Ready to tackle these challenges together? Complete this questionnaire to help us better understand what value we can bring to your life. It’s time to start making your money work for you.