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Before we can uncover Power Money in our budget, we first must understand the concept of "Opportunity Cost."
Just what is opportunity cost? Very simply, it's what you sacrifice as a result of every decision you make in life. When you choose one action over another, you are, if effect, losing out on whatever benefits were associated with the action not chosen. We make these types of choices many times every day. Most will have no economic effect. Others will have monetary consequences.
Our main concern in wealth creation is not so much the social choices we make but the monetary effect of those choices. That is to say, what does a purchasing decision we make now really cost us in terms of future dollars? Knowing this information may make a difference in our decision making process.
Let's look at one example to illustrate the point:
Let's say you go out to fast food restaurants several times per week. And for a family of four, we're looking at a cost of about $20 each trip. Now what if you eliminated just one of those trips each week and invested the money instead?
If you averaged a 10% annual return over a twenty year period, you would accumulate $65,814 in your savings account. That's right! $20 invested weekly for 20 years at an average annual rate of return of 10% will yield a lump sum of $65,814. That, my friends, is the opportunity cost of one weekly trip to Wendy's. Still hungry?
Next week we'll take a look at another purchasing decision, playing the state lottery.
Until next time, Al Crisp, CPA
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