Monday, August 6th, 2012
Have you ever wondered whether you have made the right choices in life? How different could your life have been if you had made different decisions, and what you are missing out on? In economics there is term called ‘opportunity cost’. It is defined as the value of the next best choice you give up when you make a decision. Imagine, for example, you win lotto and have $100,000 to spend as you choose. Your choices could include paying off your mortgage, buying a business, or taking your family on a six month holiday around the world. If you choose to pay off your mortgage, the ‘opportunity cost’ is the value to you of the next best choice you could have made. Continuing to own something of lasting value also means you are continuing to incur an opportunity cost; you are missing out on the value you would receive if you sold your asset and used the money for something else instead.
A combination of emotional ties and complacency can prevent us from making objective decisions about keeping or selling things we own. There are times when it is appropriate to stand back and think about alternatives. For investment assets such as property, bonds and shares, there is an easy test that helps uncover whether you should continue to own them. Calculate roughly the dollar value of the assets. Now imagine you had that amount of money in your bank account in place of the assets. What would you do with that money? Would your first priority be to buy the assets you currently own? Are there alternative uses for the money that would either enable you to enjoy life more or provide a better financial return? If the answer is yes, you may be missing out on an opportunity.
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