Your good money management decision could be costing you thousands and thousands of dollars.
If not thought of through the lens of opportunity cost. See, 99% of people making
decisions about their money or their businesses aren't thinking about it
from all angles. So how do opportunity costs affect managing your money. Let's find out.
In this video, I'm going to walk you through five ways to leverage opportunity costs to make
better decisions. So you're managing your money accurately. You're investing in the right things
and you're seeing your money continually grow. The very first thing is to understand
what is opportunity cost? Opportunity cost is the value you lose from choosing another decision.
So, it's how much it costs you to choose another option if you're looking at multiple options
inside of managing your money and it's true in anything. Opportunity cost is simply what it costs
you to go another direction and when you're thinking about managing your money you have
to understand when you go left you're saying no to going right and sometimes that's a good thing but
you have to at least take into account what could going right make you and the difference is your
opportunity cost and in a minute, I'll walk you through the formula so you understand how it works
from a very practical perspective so you can make better decisions. So, opportunity cost is simply
what you lose by choosing one of two options. For example in real estate picking one property over
another can be an opportunity cost loss. Meaning if you choose property A and property B could have
made you a little bit more that difference is your opportunity cost. But you know, it extends past our
money. Every single decision has an opportunity cost when you choose to spend your life with
somebody it costs you spending your life with everybody else. But the value in who you choose
the ideas that you're choosing something that will add more value over time. Might cost you on
the front end but it gains on the long end especially when it comes to your money.
The second thing you want to understand is how the formula of opportunity cost actually works and
here's the opportunity cost formula. FO minus CO equals OC. What this means is the foregone option
the idea is that this is what we don't choose. So this can be a property that we passed on.
Investing in a stock. Not investing in bitcoin when it was at 23,000 on its way to 65.000 and then
instead watching everybody lose all their money and being thankful you didn't. If you invested I'm
sorry. But the truth is foregone option that's a big one to understand what you say no to, okay.
So, it can be not investing in bitcoin and I had so many people tell me to invest in bitcoin when it
was in 19,000 and quite frankly between you and I wish I would have. Because it didn't drop from
65,000 down to 30 overnight I lost a lot of money by not investing in crypto at that time, right?
So the foregone option is the idea that's what you passed on. The CO is the chosen option. So, the
FO is the foregone option this is what you're not doing. CO is the chosen option. So, I'm choosing not
to do cryptocurrency or bitcoin and I'm choosing to invest in multi-family real estate that was
my reality. I'm choosing to not go the crypto route I'm going the real estate route and the OC is your
opportunity cost. So you take the foregone option this is what I could have made minus what i did
make. That's how much it cost me to choose what I actually chose. Here's why this is so valuable
because when you look at investing for example in the stock market and you know the averages are in
the 4, 6, 7, 8, percent range. You're in that 4 to 8 percent range depending on the
stock market. You play it long enough you'll get some compound interest and you'll start to grow
and you might end in the 12 to 13 range. But multifamily real estate has shown that 12%
is kind of our basement. That's where we don't do well is at 12 we're usually in the 20s and so if
you're gonna forego multi-family real estate and invest in the stock market it can cost you
anywhere from 8 to 10percent per year and this is the idea of a foregone option. Saying no to
something choosing something else. So, let's say I forego investing in real estate that could make me
18%. So this can make me 18%. But investing in the stock market is gonna make me 8 percent.
So, that's the chosen option. So, I don't invest in multi-family real estate I do invest in the
stock market. That means the opportunity cost of investing in the stock market is actually 10% per
year. I lose out on the opportunity to earn 10% per year. But let me bring this to home for a lot
of you in the United States of America. When 2008 and 2009 happened a lot of people lost their homes.
What that did the bank tightened up on money right and they made it really hard to get money.
But what that did is people ended up buying houses that really depressed pricing and then
paid off their mortgage. When this pandemic hit in the Covid19 in 2019-20 and into 2021
one-third of America owned their home outright. They had zero debt on their home. They owned their
house one hundred percent. Then interest rates went below three percent. So every single one
of you that have equity in your home that could be earning 18 percent in real estate
and it's to cost you let's say three percent. It's costing you 15% in opportunity cost to not invest
in real estate. So, your equity in your home might create safety at night but it's costing you 15%
a year on a conservative side in real estate. That's how you have to think about your equity.
I'm a big proponent of leveraging your equity for more real estate and this is why because the
opportunity cost is so low. When interest rates go down the opportunity cost of keeping your equity
skyrockets. Because we can leverage money at 3 even 4 percent and we can earn anywhere from 10
to 20. That's a lot of lost opportunity and a lot of you that own equity due to 0809 and now you've
come into this pandemic you have all the equity get it out and invest it into real estate. Because
it's costing you way too much to hold on to it. As the dollar starts to decline in value in America
getting debt is really valuable. For example, if our dollar is worth x amount globally well we can lay
it against the Canadian dollar, right? The Canadian dollar is 79% of our dollar. Our dollar is a lot stronger
back in 0809 after we printed 800 billion dollars and bailed out the banks. Our dollar leveled off
with canada our dollar came down because we had a real estate crash and printed a lot of money. Well,
in the Covid19 pandemic we're printing 800 million dollars about every four and a half minutes and
so the dollar is going to continue to decrease. So holding on to capital is going to be a huge
opportunity cost to you. Also holding on to equity as I mentioned is going to cost you a lot of money.
So right now in a devaluing dollar locking in on debt is the best hedge against the devaluing
dollar and the inflating prices in America and the reason devaluing of the dollar and inflation
work hand in hand is because when the dollar becomes worth less money it takes more of them
to buy something. That's how that works and that's inflation. The idea in opportunity cost is we need
to make sure that we're taking advantage of the current situation in a good way so it doesn't
cost us more money by inactivity or holding on or being caught in fear and really not moving.
Before we go into the last tips of understanding opportunity costs make sure you subscribe to
our channel where we post videos every single weekday on real estate investing,
leveraging money, investing raising private capital, and essentially building a financial engine that
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Let's get back to the content. One of the ways you can add up this opportunity cost is by looking at the
history of the decisions you're about to make. For example, I mentioned the stock market doing around
eight percent real estate doing about 18%. Well, how do you know that's not going to change? Because the
truth matter is investing in stocks if you invest in cryptocurrency can be a heck of a lot more than
eight percent it can be 800 percent. It can absolutely skyrocket and investing in real estate
can be not 18% it can be negative 18%. So, the truth the matter is how do we know in opportunity costs
what we should be doing. When we don't understand especially in the investing world what we should
be leveraging and what things will look like in the future. The number one thing we have on our
site is history. Look back 40 years and see what assets have performed well. This is why I place
all of my money in real estate. Because over the last 40 years especially multi-family real estate
has continued to trend up. Now, has it had dips of course but the truth is the continual trend
is northeast. For example, in 0809 we did take a dip and then it came back up and right now
multifamily is one of the most sought after asset classes in all of the real estate world.
Because the trajectory is continuing to northeast. Stock market is a continued it goes up slowly and
it continues to dip back down and we have big dips and then it'll come back and it comes back because
commerce in America is really strong. Anybody that tells you our economy is in
dire straits right now is wrong, it's just not. Our economy is strong and so we're thankful for that.
But the truth is we still have to look at history. History tells us what to do and history will often
lay out the opportunity costs. In fact, the only way you can calculate the opportunity costs
is through history. Because we're projecting these percentages of what we're going to make and things
can happen on the back end that we don't actually realize that. So, opportunity cost is a projection.
It's not an exact science it's both an art and a science and even more specifically it's an art
with scientific music and tip number five with looking at this opportunity cost is understand
opportunity cost doesn't take into account your value. For example, I might make a lot more money
fixing and flipping properties. Getting a lot more properties getting a lot of them at once. Flipping
and wholesaling those properties because you get lots of surges of cash and you don't have to use a
lot of your own money. I'd make a lot more money doing that but it has a high freedom cost. I'm
not looking for a job I'm looking for financial freedom to fulfill my mission and spend time with
my wife and the truth of the matter is I'm not going to sign up for opportunities that sabotages
my freedom and opportunity costs one of the things it doesn't take into account is your value system.
So in the opportunity costs you want to make sure you're not ignoring the idea that maybe it's not
taking into account just everything. It's one thing to have these percentages. It's another thing to
say, "Yeah, I can make 18% but it's going to take another 100 hours a month to work", then I'm not
going I'm not going for the 18%. So, when you're looking at opportunity costs you want to also
look at the freedom it costs you. You want to look at energy cost what energy is expended and before
you go forward with any opportunity make sure it slides into your value system. I want to give
you a free book today called the seven secrets of managing your money and creating wealth.
It's a book I've had fun writing and I want to make sure you get a copy of it. So, click the link below
you'll get your free ebook delivered straight to your email. I'll see you in the next video.