The third principle in the Principles of Economic Prosperity is: MEASURE. The measurement principle is all about thinking of opportunity costs before you act, and applying mathematical concepts before making any decisions. Opportunity costs are relevant in decision making and set the tone to for financial prosperity.
What are Opportunity Costs?
Opportunity costs include the value of something that must be given up or sacrificed in order to achieve something else. Economists refer to opportunity costs as not just as resources, but as the value of the next-highest-valued alternative use of those resource. In other words, it’s the loss of potential gain that you could have achieved from an alternative choice.
Opportunity costs are methods used to weigh the pros and cons of a decision you may make for your business or your personal life. An opportunity benefit is advantage received upon giving up a course of action. With an Alpha Omega Wealth advisor, you can sit down and look at your options for spending, opportunity costs, benefits, and be better equipped with the knowledge of the risks you may have for a certain venture or project.
Principle 3: Always MEASURE while Managing Wealth
Principle three states that you should always measure the opportunity costs associated with any decision-making. What could your dollars earn you if you did not spend them or commit them elsewhere? Your awareness of opportunity costs enables you to recover them in the future. If you ignore them, you may be in danger financially.
With these measured costs and risks, you can create a more reliable cost-benefit analysis of a project you wish to pursue. This analysis will give you a better idea on whether or not the project is worth pursuing, or if it will cost you more than it will reward you.
Example of opportunity cost in real life
The opportunity cost formula is what you’re a sacrificing divided by what you’re gaining. Variables to consider when calculating opportunity cost include time and long-term economic growth. An example of measuring opportunity costs is when a young adult is deciding whether to go to college or if he should start working directly after high school.
The cost of going to college includes the time spent going to class and the amount of money paid to take classes. He will also lose the opportunity to earn money from a job directly after high school. However, people will still choose to go to college because they can make up their losses by obtaining a degree, and, in turn, earning more money in the long run.
This opportunity cost measuring also works for making a plan for spending and saving money. If you spend too much of your money on credit card bills with high interest, imagine what that money could do for you in the long-run if you saved it or put it towards a life insurance policy.
Alpha Omega Wealth Can Help You Find Your Opportunity Costs
At Alpha Omega Wealth, we strive in helping our clients with private wealth management. We encourage you to be your own banker and take back control of your assets. With the infinite banking concept, you will find that you have more power and access to wealth than you thought you ever could. Contact us to learn how we can help your business succession planning by measuring any opportunity costs associated with a project or business venture.