© Elliot Essman 2005. All rights reserved.

These pages contain the complete 2005 revised text of Building Yourself, public speaking trainer Elliot Essman's guide to living the successful life.

Elliot Essman Public Speaking Training
Building Yourself Table of Contents
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• Once lost, Jupiter himself cannot bring back opportunity. Phaedrus (1st Century A.D.)

Let's say you have your money in a mutual fund that earns an average of ten percent a year. You sell the fund and invest in a stock. After a year you sell the stock for a fifteen percent profit. Your real return is not fifteen percent but five percent. You had to forgo the ten percent on the mutual fund. You're only five percent ahead of where you would've been with the fund. And you might have taken a greater risk by buying the stock.

If you sold the stock for what you paid for it after a year, your return is not zero; it's negative ten percent. For every use of money there is an opportunity cost—what you could have earned on it elsewhere. Any use of funds must take opportunity cost into consideration.

How does this concept apply in your own life? Well, for one thing, it means that it costs us dearly to sit on our money. If you keep your money in a savings account because you're too lazy to research other safe investments that pay better, you incur a real opportunity cost. If you hold onto non‑performing stocks for sentimental reasons, you lose the money you could have earned elsewhere. If you fail to take intelligent risks (which we'll discuss in the next section), inflation will combine with opportunity cost to diminish your financial position.

Opportunity cost also shows how expensive credit can be. Let's say you owe a thousand dollars at sixteen percent. You inherit a thousand dollars and put it in the bank at two percent. To make the two percent you gave up the opportu­nity to make the equivalent of sixteen percent by paying off the credit card. You lost fourteen percent on this rather unwise decision.

You want a sailboat and decide you can afford twelve percent annual interest over three years. The three years pass and the boat is now yours. How much interest did you actually pay? More than you thought. You paid the twelve percent plus what you could've made on the money had you invested it instead of making the payments on the boat. If you're a reasonably good investor this return could itself be twelve percent. In sum, that boat cost you a whopping twenty-four percent.

One more example—the waste and status seeking we spoke about earlier in this chapter. You know what I'm going to say by now. They cost more than they seem to cost. When we waste a dollar we waste not just the dollar, but what it can earn for us—compounded, doubled and redoubled.

With the concept of opportunity cost, we see that money has a volatile character all its own. It's like a wild animal that can be domesticated, but you need some skill. What skill means here is knowledge about investment alternatives. Smart investing doesn't mean becoming a Wall Street wizard, but it does mean you can't afford to be lazy with your money. You've got to learn to manage your money, which now brings us to the concept of risk.