Opportunity Cost

Think About Opportunity Cost

Opportunity CostEver heard anyone say not to try hard to pay your car loan, or your house mortgage, off early? Ever wonder the logic behind that strategy? It is based on the logic of opportunity cost. One of the topics I talk a lot about, before we even get into what solutions work for the client, is making sure the client is not wasting money currently. Since I have a strong background in Economics, opportunity cost is not just a theory, but a way of life. For those that do not know what opportunity cost is, the simplest way explain it is the following: Opportunity cost is the cost of doing something versus what you could have done different.

See, when we decide we want to do something, we pay a price. That price we pay is not doing something else. A good example would be, if you are paying extra on your car to pay it off when you could be putting that extra money into a strong interest bearing account, you would be missing out on the opportunity of gaining that interest. Why pay off a depreciating asset early? The term depreciating asset means an asset that decreases in value, over time, like your car, or your home. The math is simple. It does not make sense to focus on paying off depreciating assets early when you consider the cost of not doing something else instead, or the opportunity cost.

Another example we talk about in our free financial training seminars is the strategy of paying off a home mortgage by overpaying on the minimum amount due. At first, this sounds like a great idea. Sure, pay off your largest debt so you do not have to worry about it any longer. The problem is, you are paying into something that is not that accessible, or transferable. There is a real cost when you want access to your equity of your home.

Today, we are in a very, very low interest rate environment and the cost to borrow money is extremely cheap. So, that means if you pay more on your mortgage, you are losing out on the opportunity of what you could have done with that money. Instead, if you put that money into a safe, tax-free account, like what we use at Fitzwilliams Financial that guarantees a minimum interest of 3% and caps out at 14.5%, you would, in the long run, have much more money. In addition, you would still have the option to pay off the mortgage early, if you so desired. Contact Fitzwilliams Financial to learn more about how you can use opportunity cost to your advantage in your financial portfolio.