Opportunity Cost may be a new term to you. It is to many, because it is not talked about very often, even in financial circles. That’s unfortunate, because opportunity cost may well be one of the most important concepts to understand if you really want your money to grow.
Let me put it this way. If you pay a dollar in interest, or in taxes, that you didn’t need to pay, you not only lost that dollar, but you lost the interest that dollar could have earned had you kept it and put it to work.
The important thing to remember is that long after the initial loss takes place, the opportunity costs continue to mount. That’s because, had that dollar been working for you, it would have continued to earn interest as long as the money was left in the interest-bearing account.
Unnecessary interest and taxes paid are not the only areas where we can experience lost opportunity costs. The way we finance major life purchases, such as automobiles, homes, college, etc, can be a big culprit as well.. These are necessary expenditures in our lives and we cannot very easily avoid them. However, the way we pay for them may be diminishing our circle of wealth without our knowledge.
For many of us, paying cash has become a highly prized goal of our lives, and we are indeed proud of all of our readers for whom that goal has become a reality. It means you are no longer a slave to debt, and that’s good! That’s VERY good!
But the truth is: we finance EVERYTHING we buy, whether we borrow or pay cash! Yes! It’s true. We either pay interest to use someone else’s money or give up interest we could have earned on our own money had we kept it in an interest-bearing account. Respecting the earning power of our own cash flow is a first and important step to building wealth.
When it comes to your finances, knowledge is power, and power is control. Learn more about these and other little-known financial concepts.