What is Opportunity Cost?

Opportunity cost is often defined as the money you DIDN’T make when you used money for something else, instead of the investment opportunity that you had the chance to partake in. 

This term is thrown about by fancy investors and stock market analysts to show that they know what they are talking about. It is not always something that is relevant to every transaction but it is definitely something that is overlooked by most people when making financial decisions.

I wrote an article about whether you should pay off debt or invest. This is usually a choice you face when you receive a bonus from work or an inheritance or some other form of windfall outside of your usual income. In that article I weighed the pros and cons of both choices and did not really promote one option over the other. 

I do have a preference though.. 

INVEST

Always.

I have my reasons for this opinion and I will try to demonstrate them here. 

Example Scenario

You owe $100,000.00 dollars to the bank. 

You are paying 4.25% interest annually on that loan over 10 years

This equates to a monthly payment of $1,024.38 

Over the 10 years you will pay $22,925.04 in interest

OK 

So now you win $100,000.00 in the lottery (lucky you) 

What do you do with it?

If you pay off your debt you gain 3 things:

1. You save $1,024.38 per month. This is money that you had to cough up after taxes from your earned income.

2. You save yourself $22,925.04 in interest. This is basically money out the window.

3. You have the peace of mind of not owing the bank $100,000.00 anymore.

Your net worth is basically ZERO at this point, but you are out of debt. 

If you invest the 100K in a dividend bearing, blue-chip stock:

ie. Bank of Nova Scotia (TO:BNS) dividend yield 4.64%

1. You now earn $386.66 per month in dividends (paid quarterly)

2. Your loan payments are now only $637.72 per month if you use the dividend to offset your payments.

3. Or you can keep paying the original $1024.38 per month and re-invest the dividends into MORE stocks, thus compounding your returns.

4. You have a $100,000.00 nest egg that you can keep for the rest of your life

5. Bank of Nova Scotia has increased their dividends every year since FOREVER - so your monthly dividend payment will likely go up over time

6. The stock price will most likely go UP over the ten years as well, increasing your net worth

7. The value of debt DECREASES over time due to:

   1. You pay it off over time

   2. Inflation makes the dollar value of your outstanding debt worth less in todays dollars

   3. Or you can use your dividend payments to pay off your debt FASTER than the original 10 years by making extra payments with your dividends in addition to your regular monthly payments of $1024.38 ($1662,10 per month - this will also lower the total interest paid).

As I have suggested, there are far more reasons to invest that extra money than to pay off debt with it. Some people have a hard time sleeping at night due to debt hanging over their head or due to the stock market uncertainty and that is OK. You should know yourself before you make the decision. If you worry a lot - pay off the debt. If you are less prone to worry, I say invest it. 

If you are willing to do some homework, you can find dividend stocks that pay even better than 4.54% and you are even farther ahead. If you sign up for my newsletter you will receive my FREE stock picking guide that offers some good suggestions to start with. 

Money Mindset

Not everyone is as committed to building wealth as they could be, and there are many reasons why we stumble. We are constantly fighting against our own natural instincts to survive and many money making principles are not as intuitive as we would like. 

In order to build wealth:

We need to have long term perspective…BUT…We tend to gravitate towards quick fixes

We need to have self discipline…BUT…We tend to do what is easy

We need to use our heads, not our emotions…BUT…Money makes us crazy.

So when you find yourself facing a decision about where to put excess cash (I know, what extra cash?) do the math and figure out your opportunity cost. What will you NOT get from spending it or paying off debt. Dream big. What are the possibilities?

If you feel you don’t have enough information to make a proper decision then I suggest that you take the time to educate yourself about investing. It is time well spent. Consider it the FIRST investment that you will make..in YOURSELF. 

Read Books about Money

I have written a few books that can help you develop a plan to invest and create a foundation of wealth for you and your family using simple steps without needing extra money. I also provide an online course that give you a paint-by-numbers formula for becoming wealthy that you can watch at your leisure. 

I also recommend these 5 books to get you started. They are required reading in my opinion and will serve you well in your quest to become a money magnet. I also highly recommend this book by MJ Demarco. It is life-changing.

They say that luck is when preparation meets opportunity. I couldn’t agree more. By learning as much as you can about money, investing and economics, you could put yourself on the path to financial freedom and be ready when “opportunity strikes”. 

Good luck, my friends!