Millennials, want to catch a 🆓 version of the personal finance class your Boomer parents should have made sure was available to you when you were a kid? Click here to register for the class happening Thursday, July 1sy at 8 PM EST.
“Opportunity cost” refers to what you can potentially lose by choosing one option over another – even when you aren’t thinking about it.
Nearly every choice you make precludes something else that might have been.
Opportunity cost exists in everything from relationships to finances to career choices, but here we’ll focus on that last one. Over a lifetime, the cost of career decisions can be massive.
For opportunity costs that can be measured, usually in dollars, there’s even a math equation. (FYI, Ms. ME spent a few years as a Mathematics instructor.)
What I sacrifice / What I gain = Opportunity cost[i]
Let’s say you have two career choices. One is to work as a mechanic at $50 per hour and the other is to work as a karate instructor at $20 per hour.
Opportunity A / Opportunity B = Opportunity cost
Here it is with numbers: $50 / $20 = $2.50
To translate that, for every $1 you earn as a karate instructor, you could have earned $2.50 as a mechanic. The ratio remains the same whether it’s for one hour worked or 1,000 hours worked because it’s based on earnings per hour.
Adding a time element
We can only work a certain number of hours in a week and we can only work for a certain number of years in a lifetime. Adding time into the discussion doesn’t change the math relationship between the opportunities but it does recognize real-world constraints. Sometimes these limits are by choice. You could be both a full-time mechanic and a full-time karate instructor, but most people don’t want to work 80 hours per week. Something has to give, and that’s where considering opportunity cost comes in.
If you only want to work 40 hours in a week, you’ll have to choose one career over the other or split your time between the two. But even in splitting your time, there is an opportunity cost. Think about it like this: Every hour spent in a lower paying job costs money if you had an opportunity to earn more doing something else.
The bigger picture
In our example using the mechanic vs. the karate instructor, the difference in annual income is over $60,000 per year ($104,000 minus $41,600). Over a 40-year working career, the difference in earnings is nearly $2.5 million, and it all happened one hour at a time.
Your career choice shouldn’t just be about money – you should do something you enjoy and that gives you satisfaction. There may be several other considerations as well – like opportunity to travel, the kind of people you work with, and the greater contribution you can make to the world. However, if there are two choices that meet all your criteria but one pays a bit more, just do the math!
Strange as it may sound thanks to Covid-19 and everything else that happened in 2020 many people are doing the math and reevaluating what they want to do with their lives. For some, reconnecting with a long lost passion as a side gig or even a full leap into entrepreneurship is the direction that they are considering to achieve their desired level of wellness. If you’re in this category, tell us in the comments below. 🔻
Instant Gratification Has Overtaken Your Financial Power.
“Waiting sucks!” How many times have you thought that? While it may not feel great at the moment, waiting when it comes to spending is key to reclaiming your financial power. Remembering that old adage that “patience is a virtue” can be extremely tough in this age of instant gratification.
In today’s world you can buy now, one click order, get no interest down, and enjoy same day shipping—but have you asked why? Why is it so ridiculously easy for you to spend your money? Is it…
Because they’re committed to your convenience? (You can’t be that naive.)
Because you’ll buy from their competitor if they don’t? (#Facts but..)
Because they want your money, they want it all, and they want it now?
DING, DING, DING!!! We’ve found our answer at #3. Understand that your need for instant gratification is a conditioned response. When you’re first born into the world, you want everything ASAP. And as a baby that’s mostly ok because what you want is essential, food, love, to not be lying in your own 💩. But as you get older, good parents teach their children to wait which is why we get the terrible twos. That’s the period where we fuss and complain and generally are a nightmare to be around until we learn that you can’t always get what you want.
Unfortunately retailers have spent decades undoing the hard work your parents put in to recondition you to expect instant gratification. Why? Because they want your money—all of it! Picture a tiny stopwatch inside every dollar you own. When the start button is pressed, the dollar starts earning interest. Each dollar is ticking away, earning money for someone. Is it you, or is it the institution that has your savings account, car loan, mortgage, student loan, paycheck, or your next pumpkin spice latte? Every dollar that passes through your hands will earn money for either you or someone else. Every time you put your hard earned cash in the hands of someone else, you’re handing out little money stopwatches that never stop ticking.
It’s time to reclaim the earning power stolen by your need for instant gratification.
Money you put to work today has the potential to earn more interest than money you put to work tomorrow. Why? Because it has more time to grow. Those who know how money works never want to waste a single day of earning potential.
Did you think it’s a coincidence that taxes are taken out of paychecks now but tax refunds are not paid until the next year? Ever wondered why financial companies hold funds for a few days rather than release them to you immediately? They pay it out only after they’ve squeezed out every possible day of earning.
They’re not doing anything wrong. They’re just taking full advantage of the Time Value of Money. It’s time you did too.
It’s good if this makes you mad. You should be—you’ve been treated like a sucker. Your logical mind and personal finances are covered with the weeds of instant gratification. This threatens ALL your goals for the future. Start ripping the weeds out by reading HowMoneyWorks: Stop Being a Sucker today. Click here to request a copy.
This book coupled with guidance from your licensed and qualified financial professional can help you increase your financial literacy, stop the counterproductive behaviors of instant gratification, and start thinking—and acting—like the wealthy.
Maybe your numbers never add up or too many expenses are coming “out of the blue”. You might also feel a sense of dread every time you make a purchase. No matter what you do, this whole budgeting thing doesn’t seem to be working.
Hang in there! Here are a few budgeting potholes that might be slowing down your financial goals and how to avoid them!
Excessive or Frivolous Spending
A job loss or a sudden, large expense can change your cash flow quickly, making you wish you still had some of the money you spent on… well, what did you spend it on, anyway? That’s exactly the trouble. We often spend on small indulgences without calculating how much those indulgences cost when they’re added up. Unless it’s an emergency, big expenses can be easier to control. It’s the small expenses that can cost the most.
Somewhere along the line, businesses started charging monthly subscriptions or membership fees for their products or service. These can be useful. You might not want to shell out $2,000 all at once for home gym equipment, but spending $40/month at your local gym fits in your budget. However, unused subscriptions and memberships create their own credit potholes. If money is tight or you’re prioritizing your spending, take a look at your subscriptions and memberships. Cancel the ones that you’re not using or enjoying.
Budgets are supposed to help you use your money wisely. They should be a positive part of your life—they’re not supposed to make you feel like you’re constantly failing. But sometimes our passion to save money and get our financial house in order gets the better of us, and we set up budgets that are too restrictive. While coming from good intentions, an overly thrifty budget can actually make it harder to achieve your goals. An impossible to follow plan can make you feel discouraged and resentful. You might even decide that it’s not worth the hassle! Try starting with a more reasonable strategy and then build from there!
Sometimes our budgets are just too complicated to actually be useful. Not everyone loves working with numbers, and sometimes fiddling with spreadsheets can get so overwhelming that we just want to quit. Plus, there’s plenty of room for human error! A good option is to investigate free budgeting sites or apps. All you do is punch in the correct numbers and the magic of technology will do the rest!
One time budget
Life is constantly changing. Your simple, streamlined budget might be perfect for the life of a young single professional, but will it still hold up in five years? Where will the portion of your paycheck that works down your student loans go once you’re debt free? And when will you start saving for a house?
Take some time every few months to review your budget and see what’s changed. Evaluate what you’ve accomplished and areas that need improvement. Ask yourself what your next milestones should be and if those line up with your long-term goals!
Budgeting takes work. But it shouldn’t be a burden. Cut yourself some slack, prune your process, and stay consistent. You might be surprised by the difference filling in budgeting potholes can make in your financial life!
Did you think of another budgeting pothole that we didn’t mention? Tell us in the comments. 💬