Chapter Seven

Indispensible Economic Principles

Part 1: Opportunity Cost, Continued

Auto Financing: You buy a new car for $25,000 and finance it for 5 years at 8%. Interest paid over 5 years is $5,415. In you invested that interest at 8%, instead of paying it to a banking institution you would have $11,690 in your account in just 10 years. Since you don’t have it, the $11,690 is your lost opportunity cost. But, it doesn’t stop there. Without paying one more penny on that loan, the $11,690 loss grows to $25,237 in 20 years, to $54,485 in 30 years, and so on. That is the lost opportunity cost on that one car alone. Buy a new car, with the same deal, every 5 years for the next 30 years, and the total lost opportunity cost from financing them is $145,670; in addition to the $150,000 paid for the cars themselves.

Credit Cards: Carrying an average balance of $2,500 on a credit card at 12% interest creates a lost opportunity cost of $81,088, over 30 years, on the interest payments alone.

Compound Growth = Compound Tax: In a 31% tax bracket, principal compounding at a 10% rate of return (reinvesting the growth) for 30 years has a net rate of return of about 6%. Over the 30 years, the tax paid, plus the lost opportunity cost on the tax paid, is 70.8% of the total account value.  

Term Life Insurance: University studies show that 97.3% of term plans end without a claim, thus without value. For that 97.3%, the actual cost of owning term insurance is the total of premiums paid, plus the lost growth on the premiums paid, plus the loss of the benefit itself, which won’t be paid. For a 35 year old, $500,000 of term carried to age 65 with competitive premiums has an average opportunity cost of $679,000. Assuming premium payments stop at age 65 the compounded cost to age 85 is $2,172,800.

Sound strategy will recover a significant amount of the wealth transfers we would otherwise suffer over our lifetime. Investing recovered wealth transfers recovers opportunity cost. Identifying and reversing opportunity cost is a cost free and risk free road to increased personal wealth. Over time, recovering $250,000.00 of opportunity cost, and much more, is easily attainable. Achieved purely through economic strategy, there is no additional out of pocket cost involved in opportunity cost recovery. We can show you how.

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