Opportunity Cost:
The Wealth Killer

Lost opportunity cost is one of the eroding factors of money that people least understand. In fact, if you haven't discussed this with your financial advisor, you're probably not alone. It is rarely assessed by them.

Lost opportunity costs is the actual money you lose due to a financial decision you make verses a different financial decision. The money you lose must be an actual cost and not hypothetical. For example, the cost of lost opportunity cannot be calculated between two investments you have not made.

Losing More Money

When you lose money, you lose the potential that money could have earned you if it was invested. Talk about getting kicked while you are down.

My wife and I once invested in a hard money loan that went bad. I'll be honest and tell you that it was $30,000 that we had lost.

But not only did we lose $30,000, we lost the potential that money could have earned had we invested it in a different vehicle.

Let's look at we could have ended up with had we invested it in vehicle with an 8% annual rate of return.

Example 1

$30,000 earning 8% for 40 years = $651,735.64

$30,000 earning 10% for 40 years = $1,357,777.67

You can see how losing money today affects you in the future as well. Money lost today will erode your wealth tomorrow. Very few realize this because they don't think that money they could have had is a loss to them.

No claim, no problem?

Now that you understand the additional cost with losing money, let's explore the area of insurance:

  • Auto Insurance
  • Homeowner's Insurance
  • Term life insurance

Have you ever considered how much you would lose if these insurances never pay a claim? Let's look at an example of the cost of lost opportunity from all 3 insurance policies. Let's assume that you pay $2,500 per anum.

Example 2

$2,500 per year earning 8% for 40 years = $699,452.60

$2,500 per year earning 8% for 60 years = $3,383,675.90

You can see how financial products cost you more than you think. Now, I am not saying that you should terminate all these policies because you very well may need them.

I will say that term life insurance is something that you should reconsider. Term life insurance policies pay a claim on less than 1% of it's policies. So, you never get the premiums on these policies back. You could very well define term life insurance as lost opportunity cost life insurance

When you consider term vs whole life insurance, you'll see that you can recapture the premiums paid into whole life insurance. It's one of the advantages of whole life insurance.

When you consider everything you put your money towards, the cost of lost opportunity becomes more apparent

  • Pay off mortgage. If you own your home, how much lost opportunity is there now that your money is locked into your home?
  • Pay off credit card debt. All the extra interest you pay has additional cost.
  • 401k retirement plans. What are the true costs when your plan loses money while you could have invested it in a better vehicle?

When you add up all the opportunity costs that you incur in a lifetime, you can end up losing multi-millions of dollars. Lost opportunity costs should be calculated in every financial transaction you make.

Regarding personal finance help, spend more time trying to keep your money instead of finding an investment to make money. Plug those money leaks.

Identify them. Minimize them. Avoid them.

You will end up in a better position than the rest.

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