Wealth, Health, and Success

Opportunity Cost

You are driving home from work; you find yourself approaching your exit when you catch a new Armenian Restaurant that has opened up the road a few miles up the road from your exit to go home where you have leftovers from eating out last night. You spend an average of $40 a meal. How much is the meal worth compared to eating at home?

Now, you can see where savings and critical decision-making come into the picture. You can view this in terms of a meal or spending only $40 daily. This adds up quickly to making other people reach out. If often done, it's the equivalent of throwing away $300,000 if this is our daily spending habit over our lifetime.

There are two costs when making a purchase: there is the dollar value and the in-use value. The dollar value, self-explanatory enough, is the price you pay. The in-use value (true value) is the qualitative application of what is purchased. In other words, what benefit does this purchase provide, and does it fulfill its determined result temporarily or long-term?

This example shows clearly why many of us have poor spending habits because we purchase things at a high cost with equivalent (often times less) true value to something a fraction of its price. Spending a lifetime purchasing things without a true long-term return is the quickest route to poverty. Teaching this to your children will end your bloodline centuries earlier than needed.

As you can see, your money can very quickly make other people rich without even noticing. Can you imagine redirecting this flow of income to your own pockets for 2-5 years? In fact, this is the case when facing generational poverty. We get a check the 2nd and 4th week of the month. Shortly after receiving our income, we must pay for shelter and our utilities. This is universal. However, after this, we made individual decisions on the hobbies and events to occupy our time and our income. If these are not fiscally profitable or qualitatively reciprocal, then we see an end to our money. If these occupations are profitable, then it's endless.

Back to this example of eating out, there's sometimes a deeper quality-of-life impact on our decision. There are two ways I would approach this idea of eating out.

Let's say you are a foodie with an Instagram or blog about your recent dishes. You go to the restaurant, have a wonderful meal, explore the cultural history of the dishes, take great pictures, and create a review. A foodie is someone whose psychological well-being is directly linked to the new foods they try. If there is a blog on top of this, then there's a possibility the expense for this meal will be covered through Google AdSense.

For you and me, there's no question this will be coming out of our pocket or credit. The decision is split down the middle because we do not have any real psychological attachment, nor is it a side career. We eat the leftovers, never gain any new cultural experience, and remain unaware of the new options available. On the other hand, we can get a meal, refill on gas, ignore a phone bill, a home repair, or an event our friends asked us to attend.

How would this situation be best handled for someone on a budget or severely saving money? First, go home and enjoy the food in your fridge. Make a note to visit in a week or so when you have a new flow of income. Once you have budgeted the future experience, you can invite a friend or spouse to split the bill over apps. You can see if there's a Groupon deal or specials during the week. Anything is better than a sudden dopamine-driven decision. These impulse purchases separate us from our hard-earned wealth. We can spend a day's or week of wages in a single outing or in two days over the weekend.

Our issue is not only income, but it's primarily outflow. If you quickly find yourself separated from your wages, the thief is in the mirror. Until we are able to raise our income, we must manage our outflow. The ultimate opportunity cost is using our outflow to reinvest in ourselves with certifications, courses, equipment, or software that can raise our income. Our income doesn't magically raise itself, and it raises in response to the problems we are able to solve for society and our community.

Instant gratification is the accomplice of failure. Alone it can be a great motivator but combined with the weight of a financial future, $5 there and $10 there can change your life over a year. $5 a week is ultimately $260 a year and $1,825 if spent every day! Can you see now how people are getting rich off you?

On the other side of the coin, if you don't eat out, you can buy advertising on social media, hire someone on Fiverr, you can buy stocks or an online course/certification course. Build your skills, gain new knowledge, and solve a critical life problem for yourself and no one else. Then visit the restaurant after you've completed the new project as a reward, not because you're too tired to cook. Limit your rewards out of impulse or entitlement but after a process of earning income or solving your issues.

Reprogramming yourself to delay dopamine and delay gratification combined with savings is essential to one day becoming an investor. One can be a successful business owner with goal-oriented savings and midterm gratification. However, the danger s in the variable gratification this scenario raises. One does not know when or if there would be any return on investment or any true satisfaction of their problem. The risk is evident, so I hope one can understand why I used this scenario of coffee and restaurants. This can be drug addiction, taking the bus, using a Laundromat, a car note, prepaid phones, or any small expense bleeding your wallet daily and monthly.

This is your challenge. Identify ALL your overt and secret expenses. Everything you know is depriving you of income. Do not be shy. You would only lie to yourself. Be 100% honest and use a page or two to track your expenses.

1. Track every single outflow of income in your day, week, and month.

2. Calculate the costs daily (365), weekly (52), and monthly (12) of continuing to use these expenses.

3. Remember your 3-5 financial goals. Does the cost or process for any of these goals seem parallel to your current expenses?

4. What are your major expenses? Reorganize your list from smallest to largest debts, expenses, and all outflows.

5. What expenses have been secretly holding you back?

6. What expenses offer you the highest true value?

7. Why do you spend money? Why do you spend money even when it's not offering a return intrinsic, fiscal or physical?

Mastering the idea of opportunity cost is difficult to master because it must become tacit. It shouldn't feel like a subjugation. One cannot master discipline. You develop through a practice of discipline that is adjusted with awareness and balance until consistent.

The key to identifying a good decision is allowing for delayed gratification. Remove your mind from the entitlement of what is deserved. Focus your soul instead on what is purposed or earned. Beyond your survival impulse or wanton desire, focus on your development, and your decisions cannot be manipulated. Not even by your own perverse thoughts.

If you have done these activities thus far, then it should be clear where your money is going. The application and mental practice of opportunity cost should then be inherited as an essential process in financial decisions. Do not adopt this as a way to be cheap but as a process of managing a greater fortune entirely. "What else can be done with the money?" should be your guiding focus. Can 3-5 months bring you closer to a financial goal or bring you out of debt? Can you convert an expense to a new hobby or skill set that can solve a problem or service others? Then try it for three months, then reevaluate what needs to be done financially for the next fiscal quarter.