Opportunity Cost

Perhaps one of the most important concepts as it relates to financial planning is one that is not often discussed: opportunity cost.

Economists will often define opportunity cost as the cost of the next best thing to your first choice. Note that the concept of opportunity cost can apply to all areas in life, whether purchases, time management, relationships, etc. Needless to say it can get extremely complicated when balancing an almost limitless array of options and short versus long term satisfaction.

To further complicate matters, it very well could be that at the cost of your first choice, you may be giving up combinations of other choices. For example, it very well could be that your first choice for any given item may beat every other item individually, but what if you were able to have options three, seven, and nine for the same cost as option one? Is option one still looking as good? For many people, option one may not be as pleasing when they begin to realize the combination of items that they may giving up.

It is this phenomenon that emphasizes the importance of carefully evaluating goals with their respective opportunity costs. Without realizing the opportunity costs it is difficult to make a good decision.

One of the most important parts of financial planning is to have the ability to weigh the projected opportunity costs and then be able to make a sounder decision. Now it is acknowledged that neither people nor markets are perfectly efficient. It is extremely easy to get lost in the moment, and short-term emotions can rob us of the long term goals that we desired when our more clear-headed minds reigned over our thoughts and wallets.

A well thought out examination of one’s goals and dreams can provide a degree of defense versus these short-term decisions by helping us realize the opportunity costs of that new automobile, the larger home in a better neighborhood, or even our dining out habits. Sharing these goals with someone else who will hold us accountable improves our chances of getting what we truly want even more.

Please send your thoughts to info@objectiveplanningllc.com .

 

 

 

 

 

 

Goal Setting: An Introduction – Part 4

The Final Countdown

Hopefully you have had a chance to sleep and now are ready to look over your now shortened brackets again. By this point, you should have narrowed out 75% or more of the items that you had originally listed. What you now see before you is somewhat important to you at least at this time. It probably would be a good idea to keep each of these to reference at a later time.

Now it is time to repeat the bracket process. Have all of your remaining items listed and see how they stack with each other. Once you get down to your final eight, you really should consider getting someone you trust in on the process. Talk with them over why these items are important to you. Discuss how you would plan to achieve each of these goals. What steps would be necessary and how would it impact your life in other areas?

How practical would it be to achieve each of these items?

Please note that just because a goal is difficult does not mean that it is not attainable and should not be pursued before an easier goal. There is a saying that one should reach for the low-hanging fruit first. Those who say this probably have never picked apples professionally. When picking apples, you usually climb a ladder with a bag and pick the apples on the top of the tree (which usually are the highest quality) first, and then as the bag gets heavier, you descend the ladder and eventually pick the low-hanging fruit. Do not shun a goal or dream that is important to you because it is not easy. These may even be the most important ones to pursue first.

Now that you have had a chance to talk over at least your final eight with someone else, choose your top four and rank them. These are the items that I would advise placing your efforts and resources on.  Tell your trusted partner what these goals are and work out a plan to try to achieve them.  Keep accountable with progress reports on these goals, and chances are that you will be more likely to reach them.

Please send any stories or comments you may have regarding this article to info@objectiveplanningllc.com .

Goal Setting: An Introduction – Part 3

Prioritization of Goals

Have you put together your lists? Now comes the fun part…

Perhaps you are familiar with the bracket system in sports playoffs. In continuation of this exercise, you are going to take your lists and have a number of playoffs. Take the first two items in your list. Between these two items, if could have only one… which would you choose? The one that you choose gets to remain on your list… the other one you can revisit at a later time. Repeat this process until you are down to no more than two items for those areas that are not important to you and no more than four items for those areas that matter the most to you. Now, there is a strong chance that you will have had trouble deciding between two items… Take a look at what you feel would be ranked number one on your new list… Did anything that it eliminated give you some trouble? If so, now it is time for our “wild card” standing. Take your new wild card contender and rerun it against the top items of your list. If it is more important to you than some of your short list items, feel free to bump these other items with your “wild card”.

Now that you have your top two or four in each respective category, it is time to do some soul searching. Why is this item so important to you? What do you imagine your life would be like if you attained this dream/goal? How would your current relationships change? Correspondingly, how would you feel about yourself if you did not? Could this goal be characterized as “SMART”? If not, how would you change it so that it would be specific, measurable, attainable, relevant, and time-bound? Is there any way you could capture an image to visualize what it would be like to attain this goal?

By this point, you probably have done a fair amount of soul searching and it is time to take a break and distancing yourself from these goals that you have for just a little bit… perhaps it would make sense to sleep before looking at these again.

 

Goal Setting: An Introduction – Part 2

The List

Many people often have a variety of different interests whether related to work, interests, relationships or religion. Seldom does it make sense for one to drop everything else to pursue one thing. That being said, we all only have 168 hours in our week and a certain degree of talents, skills, and resources we can place towards attaining our dreams and goals. Most people’s goals and dreams fall in the following eight areas:

Career (Your work, job, profession, etc. and related goals)

Community (Any volunteer activities)

Educational/Mental (Any educational activities, formal or self-educational)

Family/Friends (Relations you care about)

Interests (Hobbies, travel, etc.)

Material (Items that you want: cars, jewelry, homes, etc.)

Physical (Any physical goals you may have)

Religious/Spiritual (Beliefs relating to a philosophy or a higher power)

Not everyone has strong interests in all of these areas. It may be that you have interests in only one or two of these areas. It may be that you have interests in all eight over the course of your lifetime, but it is just not practical to deal with these all at once. That is understandable as well. What thought have you given to these areas?

As an exercise, you may want to spend some time thinking about these areas in your life and write down whatever comes to mind. Try to have a list in each of these areas. If it is an area in which you do not have strong feelings, try to come up with at least eight items. If it is an area that is important to you, try to come up with a list of at least sixteen items. Do not worry about whether an item listed is really important at this stage. That will come later. This is an opportunity for brainstorming/exploration. This exercise could easily take a couple of hours of your time. Enjoy it.

Goal Setting: An Introduction – Part 1

Why It Matters

It has been stated that “If you fail to plan, you plan to fail.” As a self-described planner, I am not certain that statement is entirely true. However, it does seem that one could potentially achieve more satisfaction out of life if one had an objective or objectives and a map to get there.

After all, much talk has been given to the Harvard 1979 study or the Yale 1953 study regarding the importance of goal setting. In these studies the 3% that had a concrete written plan for their goals outperformed the other 97% combined by a factor of ten. If such a study were true, it would be extremely compelling. Unfortunately, further research has shown that no such studies existed and that these studies are urban myth. Fortunately, a study was conducted at the Dominican University of California by Dr. Gail Mathews that showed that accountability, commitment, and writing down one’s goals did matter in the amount of success one had in reaching one’s goals.

If you could potentially achieve 20 or 30% more of what you wanted to achieve, for 2-5% of your time, would that seem worthwhile? If the answer is yes, then it may make sense to continue reading beginning in the next paragraph… if not, then I do not want to waste your time. Please read or look at something else. Please enjoy life. Please do something with meaning.

For Those Who Cared… What is a Goal?

According to thefreedictionary.com, the word goal is a noun defined as: “1. the purpose toward which an endeavor is directed; an objective.” Many other dictionaries have a similar definition.

Many have suggested that a goal has five characteristics often remembered by the mnemonic SMART.

  • Specific (It is particular.)
  • Measurable (It can be objectively measured.)
  • Attainable (It is possible to achieve.)
  • Relevant (It matters to you.)
  • Time-Bound (It has a timeline to be achieved.)

In our next part, we will discuss what to do with you goals.