Category Archives: Ambition

Posted on

The Power of Opportunity Cost & Why You Should Use It

by

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?”

Posted on

What Retirement Means

by

Recently I wrote that it is time for me to re-write my Forward Story. That is because my wife and I recently achieved a major goal that we had been working on for well over a decade. With that accompished, it would be foolish to just meander without a new focus.

As I always do when I re-write my story, I start with the most distant timeframe I can envision. For me that is retirement.

The concept of retirement is a bit challenging. What does it mean to retire? We have all either known people or have heard stories of people that retired after a long employment and within a short time were either bored out of their minds or had actually passed away. Some people view retirement as a time to do nothing but relax and play.

Have you thought of what retirement means to you? I am fortunate to have many family members and friends that have already retired. By observing them I have a clear understanding of what retirement means to me. To me, retirement is simply that state of no longer needing to work for earned income. It is when passive income and/or retirement income supplies my needed standard of living. Let’s break this down:

  • Earned Income. Pretty self-explanatory, this is the most common form of income. I trade my time and talent for money. This could be hourly wages, salary, salary and commission, or contract. The biggest component of this that impacts my life is time.
  • Passive Income. This is income I receive from my investments. This can include equity appreciation through markets increasing, interest income, dividend income, etc. I get rewarded for putting my capital at risk. Very safe investments yield lower rates of return. Riskier investments typically have to pay higher rates to induce me into putting my money into them. Regardless of the actual investment vehicle and its returns, I get passive income from it. Instead of me working for my money, my money works for me.
  • Retirement Income. Increasingly rare, the company pension plan is an example of retirement income. Another example in the USA is Social Security.
  • Needed Standard of Living. Now we get a bit more complicated. I had to go and throw in the word “needed.” If I live in a tent on a friend’s property, my needed standard of living is very low relative to what it would be if I live in a four story house with a a gigantic mortgage. Of course, I get to determine my standard of living and whether I live in a tent, a four story house, or anything else. It is important to think through all of the implications of my needed standard of living vs my desired standard of living. I always need far less than I desire. You get to wrestle with all of that just like I do. As it pertains to retirement, the higher your standard of living, the more passive income you will need. This will likely delay your retirement.

Now that I have defined things, the main benefit for me once I retire will be more freedom over my time and talent. Without needing to use them for earned income, I now get to decide what is worthy of both.

Conclusion

Given this understanding of retirement, I have to calculate what that magic number is that combines both passive income and retirement income in such a way as to meet my needed standard of living. There is a lot of financial calculations and math involved in that. Nerds like me love this stuff. With all of the usual disclaimers about not knowing the future, we can then project a potential timeline for retirement.

Then I get to the more exciting part of writing the new story – envisioning the ways in which I will invest my time and talent in that new retired state. There may be some golf, tennis, and skiing in that for me, but that will be on the fringes. The retired people I know that are in their 80s and 90s are usually very active people that continue to serve and help their family, their friends, and their world. My plan will involve all of that.

What is your approach to retirement?

Posted on

It’s Time for a New Story

by

Photo by Max Saeling on Unsplash

The most powerful thing about a story is that it can make you believe. When you write a story about your future, you are committing to paper a vision for what you want to accomplish. A goal is an example of a story. The way I write my Forward Story is to create a comprehensive view in different timeframes of what I plan to accomplish. This includes many goals, objectives, etc.

I revise my story annually. At least that is my desired approach. I do not do this perfectly. For the last few years my wife and I have been working toward the completion of one of the major chapters in our life. This chapter has been primarily financial – overcoming many years of bad financial habits and decisions and getting back on course. Since this has been a dominant theme in our lives, the story has not changed that much.

Within the last year we have achieved what for a long time appeared to be unlikely. It was not easy, but we have now reached a new stage. Even though we are smack in the middle of the year, I realize that I need to revise my Forward Story now. I do not need to wait until the end of the year.

I will go back to the process I lay out in my book and begin doing a revision that will help me get my new bearings in this new reality.

Next post about the re-write

Where are you in your story? If you are ready for a re-write, there is no time like the present.

Posted on

Keeping Up Appearances

by

Keeping Up Appearances logo

My wife and I are fond of British entertainment. One of the older shows we used to watch is called Keeping Up Appearances. The main character is Hyacinth Bucket. Now, to you her surname may appear to be properly pronounced like a pail in which you carry water. Oh no…. Her name, she insists, is pronounced Bouquet, as in an arrangement of flowers. You see, a bouquet is much more elegant than a bucket. Hyacinth tries really hard to distance herself from her low-class family and to convince the upper crust of society that she is one of them. She wants to belong.

The comedic angle is that she is not, in fact, one of them. There is great fun in watching her try to keep up the appearance that she is something that she is not.

On December 1 of each year I begin the process of revising my Forward Story. As I argue in my book, my vision for the future changes with the years and with my own ambitions and values. It would be ineffective to stick with a Forward Story from a decade ago. I need a new, fresh, and relevant story for what comes next. With this annual ritual, I always look back at where I have been and wonder how things might have been different. I try not to wallow in regret. The past is gone, and there is nothing to be done with it other than learn from it.

In retrospect I can see that in some ways I fell prey to the modern Western myth that materialism brings happiness. There have been cars, lots of cars – mostly new and financed. There has been a lot of skiing, tennis, and general fun. Nothing wrong with that, but the idea that it is my right and that somehow I am owed these things regardless of my budget causes problems. There have been homes bought and then left behind for something bigger and better, with a much larger mortgage. Some of what drove that was a desire to keep up with (or exceed?) those people I knew and spent time with. There was some sort of personal dignity issue tied to our stuff. We were in some ways keeping up an appearance. What no one could see was all of the debt behind the scenes propping up the appearance.

We finally came to our senses around 10 years ago and got out of the appearances game. As a result we have a lot fewer of the trappings of success and a lot more actual substance. I give a lot of credit to Dave Ramsey for giving us the kick in the backside that we needed to realize where all that keeping up of appearances had gotten us.

As I was listening recently to a young couple on the Dave Ramsey show explaining how they got completely out of debt, one of them said she had learned how to be content. I think that is also a big key for us. It is a challenge to be content when you live in a materialistic society where some of the smartest and best educated people in that society get paid a lot of money to make you want the products they are selling. That old car just doesn’t look as good as that brand new luxury car on TV with the big red bow on top.

As we finish off another year and get ready for a new one, ask yourself if you are keeping up any appearances. I have found that it is expensive and burdensome. There is a lot of peace in setting all that aside in favor of contentment.

Let me know if you would like any help in getting started with your own personal Forward Story. I would love to hear from you.

Posted on

I Don’t Have the Language for That

The Main Barrier to Understanding

by

Nearly every day I find myself in conversations where the main barrier to understanding is language. Every area of knowledge has specialized language that must be mastered to truly understand.

Let me offer some examples:

  • Medicine – “adrenocorticotropic”
  • Engineering (Mechanical) – “draft”
  • Engineering (Electronic) – “impedance”
  • Math – “quadratic equation”
  • Philosophy – “ontology”
  • Athletics/Cricket – “wicket”
  • Theology – “soteriology”
  • Software – “LAMP Stack”
  • Financial Markets – “derivatives”
  • Law – “habeas corpus”

If you will begin to observe the times that you struggle to understand something, you will notice that the problem is usually not that you are not smart enough. It is usually that the speaker is using a specialized vocabulary that you do not yet possess.

I say usually because there are some concepts and fields of study where the ideas themselves are abstract enough or complicated enough that rare intelligence is required. For everything else, though, I am arguing that language is the key to unlock the doors.

It may be that learning is really about words. It may be that education is simply starting with a very basic vocabulary based on the ABCs and then continually building that vocabulary. Of course, I am not saying that we must just learn words. The words that we learn must be understood, else they will produce no meaning and we will forget them. These words must be connected to concepts. The words are abstract symbols that stand-in for the concepts.

I recently sat in on a two hour meeting with electronics engineers doing a schematic review. I am not an electronics engineer (EE). Let’s analyze the situation. Three of the people in the room shared a common background and a common language. They all studied engineering in college and have now been working in electronics circuit design for decades. That common background includes immersion in math and science. It also includes expertise in electricity and micro-electronics. They all understand the computer-based tools they use to design their circuits, and they also understand the way the electronics will be manufactured. About the only thing I share with them is that I understand the manufacturing side. So I sat in that meeting for two hours in wonderment at how much I do not know. I had fun just trying to make a note of all the terms I did not truly understand. I was inundated with terms and acronyms that I could not define.

This leads me to appreciate that in any field of study that I want to understand, I must be committed to learning the language. However, it is not just learning the lingo, it is actually understanding the words, terms, and acronyms. There is a recursion that has to take place to really understand a new term. Recursion means “the act or process of returning or running back.” If a new term is a specialized twig way out at the end of a limb, I need to use recursion (go back) to first understand the limb it is attached to. If I don’t understand the limb, I keep going back to the branch, then the trunk, then the roots. At some point I find the concept that I already understand. If that point is at the roots, then I start building back up to the trunk, branches, limbs, and finally to my specific twig. This is the way language and understanding builds.

This is the reason that I respect all disciplines. To function at a high level of understanding we all had to build our knowledge. Whatever your field of knowledge, you have invested time to master the language. If you decide to learn something new, it starts with language.

In recent years I have become unashamed to say to someone “I don’t currently have the language for that.” I then recursively explore the language with them to arrive at knowledge.

Do you have some examples where your field of expertise has specialized language that is a barrier to understanding? Have you run up against a language barrier that you had to overcome to achieve a goal? Please share these in the comments section.

Posted on

Emily Brontë Died at Thirty

How Old Are You?

by

Charlotte Bronte coloured drawing
My wife and I recently watched the movie To Walk Invisible about the Brontë sisters. These amazing sisters created some of the most enduring works of English literature.

The eldest sister Charlotte wrote Jane Eyre (Penguin Classics). The youngest sister Anne wrote Agnes Grey (Penguin Classics). The middle sister Emily wrote Wuthering Heights (Penguin Classics).

Their decision to write and publish under male pseudonyms is an amazing story of strategy and perseverance. Charlotte was “Currer Bell,” Anne was “Acton Bell,” and Emily was “Ellis Bell.”

As with all writers in their day, their work was conducted often by candlelight and always by hand with ink and quill on paper. I am writing this post in an online editor with cut and paste, auto-spell check, and the ability to publish to the world with one click of the “publish” button. It is hard to even envision the painstaking effort they expended to bring these works to readers.

There are many aspects to their story that I find amazing, but perhaps the thing that strikes me most is the fact that Emily Brontë lived only 30 years. In fact, her youngest sister Anne lived only 29 years. Charlotte lived only to the age of 38.

I do not measure myself against women who were among the most gifted writers in the English language, but I do draw two lessons from their lives:

  1. Youth should be no barrier. If anyone told them they were too young, the Brontës did not listen. Some of us seem to be waiting until some magic future date when we are of sufficient age to do something important. Go ahead and do it now. Will you get better at it as you get older? Probably. Maybe. Maybe not. In the case of the Brontës, there was no getting older. Life is uncertain and short. That leads to the second lesson…
  2. What are you waiting for? Go ahead and get started doing something you really want to do and need to do. Don’t wait for later and older. Do it now. Get it started. Do not let resistance paralyze you. If you plan to do creative work (writing, music, art, entrepreneurship), get a copy of The War of Art: Break Through the Blocks and Win Your Inner Creative Battles and let it motivate you. The main thing is to act. Now.

I have to confess that while we have had copies of both Jane Eyre and Wuthering Heights in our library for years, I have read neither. I am going to correct that soon. I think that as I read them knowing just how young these authors were when they wrote them, it will really reinforce the two lessons above.

Hopefully it will motivate me to act.

How old are you at present? If older than 30, take encouragement from what these young women did at a younger age than you. If you are younger than 30, follow the Bronte’s lead. Make it happen.