Incorporating Income and Opportunity Cost Into Your Financial Planning Strategies
Wouldn’t it be nice to have an easy-to-follow, straightforward strategy to use in understanding and evaluating this multitude of financial products and possibilities? Well, I have good news for you! There is! There is one financial strategy that reigns superior to all the others; one that allows you to address even the most pressing of financial concerns.- Prosperity Economics.
Prosperity Economics already acknowledges that it’s not all about your net worth. It is, however, fundamentally about your income. It may seem a little too simple or too good to be true to base all of your financial decisions on asking yourself how it will affect your income, but go ahead. Try it.
How will buying a new house affect your current income? Will your mortgage payments be more than what you’re currently paying, negatively affecting your income? How will quitting your job to go back to school affect your income? Obviously, you won’t have an income anymore, but having a higher education degree increases your future income potential. Is it worth it?
We are a nation built upon the dream of financial prosperity. Most of us go to school not to better educate ourselves, but to make more money. We try to climb the corporate ladder because we know that with that promotion comes more money. We’re a country of people totally obsessed with money. We can’t survive or thrive without money.
That being said, it’s no surprise that evaluating our income, and how our financial decisions are going to affect your income, are important aspects of financial planning.
If you think that by having a job you’re doing all you can to generate income, you’d be wrong. It’s obviously the easiest and most predominant method of generating income, but it’s not the only method–nor even the best. After all, your income from working at a job is limited by the hours in the day. Every good financial plan includes the management of various assets, as opposed to just one, in order to generate income. You have to broaden the scope of your financial plans to include various methods of generating income, having money flowing through your assets, in order to have a successful financial strategy under your belt.
We are all aware of the basic principles of cost and benefit. We heard the term used countless times in our introductory economics courses in high school and college. The desirability of any decision, not just a financial decision, is a direct measure of the cost and benefit. Ok, so we get it, right? Wrong!
Many of us fail to realize the true cost of the financial decisions that we make on a day-to-day basis, whether in our businesses or our personal lives. To understand the true cost of a financial decision, we must properly evaluate the opportunity cost. Without an understanding of opportunity cost, it’s nearly impossible to devise and execute a comprehensive financial strategy that meets all of your goals and expectations.
So what exactly is opportunity cost? To put it simply, it is the value that you would have received had you not lost an asset. Take this example. Let’s say you have $5000 and decide to invest it in mutual funds. If it does well, there will be taxes to pay from those gains. The taxes are a cost. Let’s say that the taxes amount to $500–you have to pay that from somewhere, and since the account caused the taxes, it’s fair to calculate taking that $500 tax bill out of the account. But this also means that $500 is no longer there to continue to grow. Had it not been lost to taxes, it could easily have grown to $16,000 in 50 years. But you didn’t have it–so it didn’t. You lost $500 to taxes, and that caused you to lose $15,500 in opportunity costs. Recognizing this very real truth would allow you to consider these costs in light of alternate ways of handling your money with lower–or even zero–opportunity costs. This is the only truthful way to consider what an investment might really yield.
Why is opportunity cost so important? Well, simply put, it’s a way of evaluating the attractiveness of various financial possibilities, assisting us in making decisions to create better financial strategies.
So I guess now is a good time to ask yourself – Have you incorporated the “all about income” philosophy and calculation of opportunity cost into your financial planning strategies? Do so, and you increase your chances of a more prosperous monetary future. If not, seek out an experienced prosperity economics advisor to show you what changes are possible.
What do you think? Let me know in the comments below.
Randy Whittle