The Power of Opportunity Cost & Why You Should Use It

Writing this article has been on my task list for over three months. I chose to do many other things instead of writing it. I will come back to this at the end…

What on earth is opportunity cost?

Opportunity cost can be defined as:

The value of what you have to give up in order to get what you want.

Another way to say this is that opportunity cost represents the benefits you give up in choosing one option over another option.

It can be difficult to identify opportunity costs when the benefits of the alternative choices aren’t easily measurable. Fortunately, some alternative choices are easily measurable. Let me give you a couple of examples.

Smart Phone

I first encountered the concept of opportunity cost in economics. It is rather easy to see when you put it in terms of money. If I spend $1,000 today on a new smart phone, that is $1,000 that I cannot invest in a stock mutual fund (for example). Doing a quick financial calculation, if I take that $1,000 and invest it in a mutual fund earning a 6% annual return compounding monthly, in 20 years the value will be $3,326. So the opportunity cost of purchasing the new smart phone today is $3,326 in 20 years. Of course, there is value in me having that smart phone today, so I may still choose it. I will just be better informed about the actual opportunity cost of that choice.

It’s a New Car!

One more financial example.

As a young person, I felt it necessary to always drive a nice, new car. I never had the money set aside to be able to pay cash for a nice, new car, so I financed it (aka I went into debt). This means I had a fat monthly payment to make to the lender that funded the loan on the car. The financing was typically four years. I had to make 48 monthly payments before the car was really mine. This reminds me of the old saying “I owe, I owe, so off to work I go.”

As vehicles became more and more expensive, car dealers began working with their finance arms to offer increasingly long loan payoff terms. This was to keep the monthly payments “low.” That meant that to buy a new SUV, I might be making that monthly payment for six years or even seven years.

Let’s not get too crazy with this example. I am going to use the four year loan length. Let’s say I buy an SUV for $40,000. I finance all of the price at 6% interest for four years. My monthly payment is then a whopping $939 per month! On top of that, I still have to insure it, register it, maintain it with oil and tires, repair it when it breaks down, and keep it gassed up. That is quite a commitment.

The problem with a vehicle is that it is a depreciating asset. It goes down in value with each passing day. Eventually, it will be worth nothing. How do I know this? Most of the vehicles I have purchased are now rotting in a junkyard somewhere or have been crushed into large cubes. The same can be said of the smart phone. It will eventually be worth nothing.

Thinking in terms of opportunity cost, what would that $939 per month car payment be worth if invested in a mutual fund with a 6% return compounding monthly? In four years it would be worth $50,819.

When I was buying cars this way,  there was a related problem I faced. After about four years I was ready for a new car. After all, the new car smell had long since vanished. The paint had a scratch or two. So I repeated the process. I bought into the idea that “I will always have a car payment.“

So let’s go with that logic and assume that I will continue making that $939 car payment every month for 20 years. When we do that math, at the end of 20 years I will own a fourth “new” vehicle that is worth a lot less than when I bought it. That is what a depreciating asset is after all.

If instead of purchasing vehicles this way over the 20 years I instead invested that $939 per month into a stock mutual fund with a 6% annual return, my value in 20 years would be $434,000. Guess what? I could then remove $40,000 cash from my mutual fund and pay cash for a brand new vehicle.

“Wow!” you say. “Why doesn’t everyone do it  this way?”

For several powerful reasons:

  1. To actually do it this way you have to delay gratification and possibly drive (G A S P) an old car you pay cash for. Definitely no new car smell there.
  2. To do this you have to be able to withstand the constant marketing and advertising of some of the smartest people on earth whose job it is to get you to “need” that new car smell. Think white Lexus, huge red bow on top, and snow lightly falling on you and your golden retriever.
  3. Finally, you have to overcome the peer pressure that might come from those who could look down their noses at you for driving something they view as beneath your station in life. What would the neighbors say?

Once I really learned the lesson about opportunity cost with regard to cars, I became a little obnoxious about it. In an effort to  help my kids learn the lesson, I would sometimes look at a parking lot full of expensive cars and say something like: “Look at all those beautiful depreciating assets.” They were not that amused.

One reason few of us do the opportuntiy cost calculations above is that there is indeed value in doing or enjoying something today. Driving in that new car smell, getting the latest smart phone, or having that daily cup of joe brings a certain amount of pleasure.

The concept of opportunity cost is not limited to financial matters. The reason I am a guitar plunker with a very limited skillset is because 10 years ago I prioritized other things above playing guitar. Those things may have been more important, but I still chose them over guitar. I wonder how many things we could all learn and accomplish if we didn’t binge-watch streaming entertainment? It takes a certain amount of vision to see beyond the present moment and to see what this moment could lead to if I chose a different opportunity.

In chapter 11 of my book Forward Story I write about vision: “Your mind has an amazing ability to visualize a future that has not yet occurred.Some of the greatest inventors and entrepreneurs that have ever lived had the ability to visualize their invention and how others would use it. They could see how it would make peoples’ lives better before it ever became a product. That is vision.”

You and I likewise have the ability to develop the vision to see the opportunity cost in anything we buy or in any way we spend our time and talents. We must nurture that kind of vision.

Conclusion

Back to the point I began with. Writing this post has been on my list for over three months. The reason it was not written before now is that I took the opportunity to do other things with my time. The reason it is being written now is because I chose it over all of the other things I could have done with this time. Such are the decisions we make.

My encouragement to myself and to you is to be more intentional about the opportunities we take. Pay attention to opportunity cost. Ask “Is this the best and highest use of my time, money, and talents? Ask “What am I giving up or postponing by choosing this option?”

Changing Seasons

As we approach the end of summer with the autumnal equinox, I find myself appreciating the changing of the seasons. Here in Texas we usually have a hot spring followed by a scorching summer followed by a hot fall. Even here, though, the changing of the seasons is noticeable if you pay attention.

Moving into autumn the daylight is getting shorter. The morning temperatures are a lot cooler. The trees are starting to think about changing colors. The Friday Night Lights start to glow (in this region that is actually part of nature). Until I started gardening I did not pay much attention to the seasons. I now find myself feeling more tied to light, darkness, rain, temperature, planting, and harvesting. Just about the time I am getting tired of the long hot days, they start getting shorter and cooler.

The changing seasons are a metaphor for life as well. I have never met anyone who truly loves change, at least not all change. I tend to get set in my comfortable routines and find that any change or disruption to them is annoying, even if the change is ultimately better (which it often is). Even though most of us don’t love change, we have to make peace with it because things change. It is one of the few constants.

Since change is inevitable, I try to get philosophical about it. Perhaps just as I welcome the changing of the seasons I can also welcome other types of change. There are many seasons of life that people experience. We greatly enjoyed the season of life when our children were small. When they started school that brought many changes to our lives and routines. When they left for college we again faced great change. Now that we are empty nesters and see the gray hair in the mirror, yet more change. When we face changes to the seasons of our lives we try to look for the new and exciting possibilities. It is not always easy.

My practice of writing an annual Forward Story (detailed in my book by the same name) helps with this process of change. It actually empowers me to not only think about what changes are coming, but to take some level of responsibility about how I will handle it and respond to it. It allows me to embrace change as exciting and positive. It is a choice I make.

Sometimes change is thrust on us and is most unwelcome. This is true with the death of a loved one. We did not ask for it, but it happened anyway. Many of my friends have suffered change because of a hurricane and flooding that they did not want. Change is inevitable and comes in many flavors. We are in charge of the way we respond to it.

How do you cope with the changing seasons in your life?(leave a comment)

Too Many Irons in the Fire?

warmth-fireIdeas are portable and easily shared. In a recent conversation with my friend, Coach Deborah Newkirk, I repeated the familiar refrain: “I’ve got too many irons in the fire.” This idiomatic expression comes from the days when blacksmiths had literal iron bars in literal fires. We now use it to mean “I am really busy.” Deborah shared something that her friend Dr. Jerry George said to her (see how portable ideas are?). Since I did not hear it directly from him, I will offer this as a paraphrase. I am not even sure of the context in which he said it to her, but here it is:

When you have a lot of irons in the fire, don’t be afraid to add more irons. Accept the blessing. – Dr. Jerry George

That resonates with me. Even though I do have a lot on my plate, I need to adjust my attitude a bit and remain open to new opportunities and blessings that come my way. The “too many irons” mindset can become an excuse for not doing something that matters. It may also prevent me from accepting a tremendous new opportunity.

The new approach I plan to adopt is to not be afraid of all of the irons I have heating, but rather to attend well to them while being open to even more irons. Now, not every iron is as important as the others at any given point in time. I may need to focus on some more than others at this moment, but they are all a blessing.

Having a lot of irons in the fire is a very good thing.

If you don’t believe me, just ask someone with nothing to do.

How Did You Sleep Last Night?

64 Max sofaMost mornings my wife and I ask each other “How did you sleep last night?” Let me ask you: How did you sleep last night? The answer we give is usually a combination of how long (number of hours) and the quality (e.g. “tossed and turned” or “slept like a rock”). The reason this matters is because the length and quality of sleep has an impact on how well we function during the day. If I were concerned that you would not agree with that assertion, I could point you to a lot of research that demonstrates the importance of sleep and how it affects alertness and performance. That information is only a web search away. However, I have not yet met anyone who thinks sleep is unimportant.

Until the last few years I did not think seriously about sleep. I was a night owl who thrived when the sun set and who despised the ringing of the alarm clock. Now I care about sleep because I care about how well I function during the day.

My recent focus on sleep is part of an overall improvement in health that I undertook over four years ago. When I lost weight through nutrition and began exercising regularly, my sleep improved. As the weight dropped, my snoring stopped. Now that I care more about the length and quality of my sleep, I monitor it more. In addition to losing weight, here are three habits I have developed that improved my sleep:

1. Monitor It Using Technology – I use a phone app called Sleep Cycle. It is available for both iPhone and Android phones. My fiend Kevin Wilson told me about it. This app does two things really well. First, it tracks the length and quality of your sleep. Using your smart phone’s accelerometer, the app tracks your movements in bed and correlates them to sleep phases. Each morning I can see what my sleep quality was (expressed in %) and the duration of time I was in bed (in hours and minutes). The second thing it does really well is wake me up. The app plays a low and soothing sound or a song from your music library to wake you up. The key is that the app waits to begin playing the music until you are in a light stage of sleep. Given that the music plays quietly while I am not in a deep sleep means that I awake much more easily and in a much better mood. I really cannot recommend this app too highly. Here is an example of a daily summary:

IMG_5725

I love this quote from The Guardian on the Sleep Cycle app’s alarm function: “The result is so gentle and lovely it feels like being woken up by a mermaid stoking your hair or a unicorn nuzzling your toes.”

2. Eliminate Blue Light Before Bed – Before electric lights people generally started getting ready for bed when the sun set and awoke at sunrise. With the invention of electric lights, TVs, smart phones, etc. we have created the ability to have our eyes exposed to light well after sunset. The reason this matters is that our bodies begin producing melatonin when the lights go down. Melatonin is the sleep-inducing hormone produced by our bodies that impacts our circadian rhythms. While all light can inhibit melatonin excretion, blue light from electronics devices is especially detrimental. I try to eliminate blue light in the two hours before bed, but I have to admit that this is a challenge during football season.

3. Deep Breathing Exercise – About 30 minutes before bed I take one 400 mg tablet of magnesium glycinate. I take KAL – Magnesium Glycinate 400, 180 tablets brand, but just make sure it is magnesium glycinate instead of other chelates (like citrate).

  • I then get in bed and inhale and exhale very slowly eight times. This is not chest breathing, but “belly breathing.” Put your hand on your stomach and feel it rise as you inhale. Inhale through the nose, not the mouth. Remember, this is not to be done quickly. It is slow.
  • When I get to the maximum inhale, I typically pause for a second or two before exhaling very slowly through the mouth.
  • Again, when the exhale is completed, I typically pause a second or two again before the next inhale through the nose.
  • After my eighth exhale is finished, I then read a book. I usually read a physical paper book, but an e-reader with no backlit screen would also work. In other words, I avoid blue light devices. It usually takes less than twenty minutes for me to get very sleepy and to click off the bedside light.  Also, I always sleep better when the room is completely dark.

A Word About Sleep Apnea & Jerrod Heard

Last week it was reported that Texas quarterback, Jerrod Heard, went to a sleep clinic and was diagnosed with sleep apnea. This was surprising to a lot of people because many believe that sleep apnea is an older person’s challenge. Jerrod is in his early twenties and is in top physical condition. His openness about this continues to be a source of encouragement to many people to consider their own sleep. Sleep apnea is only one of many sleep disorders that people struggle with. Let me be clear about this: None of what I have written above about how I sleep better is going to correct a sleep disorder. If you are not waking up refreshed and ready for the day at hand, please speak to your doctor and consider doing a sleep study. Thank you to Jerrod for waking us all up to the fact that even young people can experience sleep disorders.

How did you sleep last night? Use the Comment button to share your thoughts and questions about getting a good night’s sleep.

Tweets of the Week: Food, Recipes, Health, Family, & Wisdom

Week ending July 18, 2015

twitter-bird-4Saturday is a good day to recap the activity from our Twitter feed from the past week. Not sure what Twitter is all about? That’s OK. Neither are we (or at least it remains somewhat mysterious to us). There is no denying, however, that there is some very valuable information shared on Twitter. That is what this weekly feature is all about. Click the links below to check out the good stuff. Here are my Top Tweets from this past week, great for retweeting (whatever that is). If you missed these, follow Forward Story on Twitter.

By the way, if you are wondering what the @ and # signs are all about, these are Twitter’s way to identify the Twitter handle (@) for the person who tweeted (for example, ours is @forward_story) and to allow for an indexing or categorization of the tweet by using one or more hashtags (#). Feel free to ignore these and just follow the link for the content we are sharing with you.

Here are a few recipes from people we trust:

Maria Emmerich ‏@MariaEmmerich Jul 13
Peanut Flour Cake http://buff.ly/1K01ctz #LCHF #keto #lowcarb

Danielle Walker ‏@againstallgrain Jul 12
Dark Chocolate Peanut Butter “Granola” Bars #paleo #againstallgrain #glutenfree http://grainfree.ly/1flgUFD

Russ Crandall ‏@thedomesticman Jul 16
Seared Scallops with Sautéed Kale http://thedomesticman.com/2012/12/18/seared-scallops-with-sauteed-kale

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Cooking & Kitchen

 Colin Champ, M.D. ‏@CavemanDoctor Jul 13
Home Cooked Meals Make You Smarter, Healthier and Thinner http://www.myhealthwire.com/news/diet-nutrition/1080 … via @myhealthwire

Experience Life ‏@ExperienceLife Jul 14
Want to get healthy? Start in your kitchen! says @markhymanmd @mindbodygreen http://j.mp/1GjFbRu #learntocook #MyRevAct #healthyliving

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Health & Fitness:

William Davis, MD ‏@WilliamDavisMD
Novak Djokovic is “gluten-free” but also limits his carbs–I know because I wrote the foreword for his book…. http://fb.me/6EhfpO9pD

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Money & Finances

Rachel Cruze ‏@RachelCruze Jul 14
The Financial Mistake One-Third of Parents Make https://www.yahoo.com/parenting/the-financial-mistake-one-third-of-parents-make-123996068377.html?soc_src=mail&soc_trk=ma

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Parents and Grandparents

Susan Adcox ‏@grandparent Jul 11
Grandparents, don’t be unwitting drug suppliers: http://ow.ly/PuseU @aboutdotcom

Susan Adcox ‏@grandparent Jul 12
1 in 28 American children has an incarcerated parent. Often grandparents pick up the slack: http://ow.ly/PuR57

Susan Adcox ‏@grandparent Jul 14
Taking the grandchildren on an outing? 3 easy steps for managing their behavior: http://ow.ly/Pzrqh @aboutdotcom

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Wisdom from Seth

Seth Godin ‏@ThisIsSethsBlog Jul 13
Bounce forward http://sethgodin.typepad.com/seths_blog/2015/07/bounce-forward.html

Seth Godin ‏@ThisIsSethsBlog Jul 16
Seth’s Blog: In search of metaphor http://bit.ly/1HQhFg2

Seth Godin ‏@ThisIsSethsBlog Jul 18
Seth’s Blog: “Because it has always been this way” http://bit.ly/1LtdBIh

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For Entrepreneurs

Abel James ‏@fatburnman Jul 16
14 Entrepreneurs Share Best Advice From Their Fathers http://cr8.lv/1I6mNB6 via @creativelive

Tweets of the Week: Food, Health, Family, and More

Week ending July 11, 2015

twitter-bird-1We took last Saturday off to celebrate the 4th of July with our family, but we are back today with more great info. Because of the week off, today’s post is a little over twice as long as usual. We found some great stuff on a variety of topics.

Saturday is a good day to recap the activity from our Twitter feed from the past week. Not sure what Twitter is all about? That’s OK. Neither are we (or at least it remains somewhat mysterious to us). There is no denying, however, that there is some very valuable information shared on Twitter. That is what this weekly feature is all about. Click the links below to check out the good stuff. Here are my Top Tweets from this past week, great for retweeting (whatever that is). If you missed these, follow Forward Story on Twitter.

By the way, if you are wondering what the @ and # signs are all about, these are Twitter’s way to identify the Twitter handle (@) for the person who tweeted (for example, ours is @forward_story) and to allow for an indexing or categorization of the tweet by using one or more hashtags (#). Feel free to ignore these and just follow the link for the content we are sharing with you.

Here are a few recipes from people we trust:

Danielle Walker ‏@againstallgrain Jun 28
Homemade Gluten Free Chicken Nuggets #glutenfree #againstallgrain http://grainfree.ly/1JTHC2W

Danielle Walker ‏@againstallgrain Jun 28
Also- in need of pies and cakes for the weekend? These are all grain-free and dairy-free! … http://grainfree.ly/1IDx1VR

Danielle Walker ‏@againstallgrain Jun 28
Black Bottom Banana Cream Pie #paleo #glutenfree #againstallgrain http://grainfree.ly/1IYEu7A

Chris Kresser ‏@chriskresser Jul 7
Five delicious dairy-free ‘milk’ shakes. Cool off and indulge Paleo style. http://bit.ly/1LP1fKT

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Parenting

Great stuff for parents with adult children – 3 Tips for When Your Kids Move Back Home | Rachel Cruze: http://www.rachelcruze.com/topics/kids-and-money/3-tips-for-kicking-out-boomerang-kids#.VZRvRNmGxy_.twitter

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Grandparenting

Susan Adcox ‏@grandparent Jun 28
10 mistakes to avoid when traveling with grandchildren: http://ow.ly/OT3Th @aboutdotcom

Susan Adcox ‏@grandparent Jul 3
Especially for grandparents: How to keep from going broke in the gift shop. My latest piece for @GRANDMMagazine: http://ow.ly/P9BDz

Susan Adcox ‏@grandparent Jul 5
Help for grandparents who have trouble saying no to adult children. http://ow.ly/PaLmC @aboutdotcom

Susan Adcox ‏@grandparent Jul 5
MT @grandmasbriefs: RT @NBCNews: A widow’s reverse mortgage ‘nightmare’ http://nbcnews.to/1RUhjux

Susan Adcox ‏@grandparent Jul 10
Grandparents have seen this change, and it’s not good! RT @aboutdotcom: Study finds little kids need to exercise more http://abt.cm/1IJtIkt

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 Medical, Health & Fitness

Chris Kresser ‏@chriskresser Jun 28
Chronic inflammation is believed to be a major risk factor for #osteoporosis. http://bit.ly/1R6S5c0

Chris Kresser ‏@chriskresser Jun 28
Virtually all skin disorders, including #acne, are inflammatory in nature. http://bit.ly/1LeMPV9

Mark_Sisson ‏@Mark_Sisson Jun 30
Why precommitment beats willpower. http://ow.ly/OZBMs

Amy Kubal ‏@AmykRd Jun 30
The benefits of going for a walk are about more than getting exercise http://www.theatlantic.com/health/archive/2015/06/how-walking-in-nature-prevents-depression/397172/

David Perlmutter, MD ‏@DavidPerlmutter Jun 30
Statins reduce libido. Read the science: http://www.drperlmutter.com/study/is-decreased-libido-associated-with-the-use-of-hmg-coa-reductase-inhibitors/ … #brainmaker #grainbrain

Digestible Tips for Staying Gluten-Free On-The-Go – Modern Wellness Guide http://www.modernwellnessguide.com/lifestyle/digestible-tips-for-staying-gluten-free-on-the-go

Forward Story ‏@forward_story Jul 1
This Is Your Body On Sleep Deprivation http://www.huffingtonpost.com/firas-kittaneh/this-is-your-body-on-slee_b_7663702.html

Amy Kubal ‏@AmykRd Jul 1
Why Body Mass Index (BMI) Is Wrong for So Many People http://huff.to/1H035p0

Abel James ‏@fatburnman Jul 5
6 Easy Tips for Clean Eating on a Small Budget http://flip.it/l22jz

Amy Kubal ‏@AmykRd 7h7 hours ago
This is your body on alcohol: http://drugabuse.com/featured/the-effects-of-alcohol-on-the-body/

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Money

Experience Life ‏@ExperienceLife Jun 28
The Mirrors of Your Spending — How our most intimate sense of self & our use of #money reflect each other http://j.mp/1BH9LJw #values

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Wisdom / Productivity

Seth Godin ‏@ThisIsSethsBlog Jun 28
Seth’s Blog: Buzzer management http://bit.ly/1GIZTvB

Michael Hyatt ‏@MichaelHyatt Jun 30
Why You Should Flush 90% of Your To-Do List Down the Toilet http://mhyatt.us/1ol0bFb

Experience Life ‏@ExperienceLife Jul 7
New job jitters? How to settle in with minimal stress — http://j.mp/1KKe8Xh #worklife #balance #stressmanagement