Here is a question to think about – What is your most important asset? Your car? Your house? I bet you can’t think of it. Here is a hint – what is the one thing that you absolutely cannot do without?
We all are going to die. Science fiction aside, we are all stuck with this fact. This makes time the only commodity you can never have enough of. I bet if you think through anything you do, time is the key consideration. This might not be explicit, but it is always there at least implicitly. With this in mind, what is the goal of Retirement? It is about gaining control over your time, the time you have left. The sooner this happens the better for most of us.
You can think about time in two ways. First, what is the value of my time currently? Second (and equally important) does what I’m currently doing exceed, or at least equal the current value of my time. But, no matter the experience, the time is lost forever. That is the cost of pursuing whatever opportunity you have been given, also known as opportunity cost.
Traditionally opportunity cost is defined as what you give up when you choose one thing over the other. For example, you choose to invest in a real estate property over the stock market. The cost of that decision is you gave up the opportunity to realize the gain of the stock market over a specific period of time, to realize the gain of a real estate property over the same period of time. In real life, this defines just a very small part of how we make decisions. Of course, there are other things you can do with your money, anytime you make a choice. That by itself isn’t all that helpful, because it doesn’t include the value of your time. For any concept to be useful it needs to be specific to your life. How investing in that real estate property fits into your optimization of time, is really the most important aspect of the selection process. So, there are many variables that come into play. The decision-making process is not just a simple comparison of one thing against the other.
Why is this important?
“Investing”, i.e. taking advantage of opportunities is a two-step process. First, define what the asset, or opportunity is going to do for you. Second, decide how much you want to pay for it. How much of your stored time (i.e. money) is the service worth? It’s in this step where the big mistakes get made. Figuring out how much a given thing is worth to you isn’t easy because most people don’t have a clue how to correctly value their time. So, it isn’t clear how much of their cash a particular asset is worth, or how much time an opportunity is worth. This is the right way to think about your “opportunity cost.”
The confusion stems from not clearly defining the factors that go into the decision, personal and otherwise. What is needed is a framework that clearly separates the concerns that are intrinsic to you, and those that are external or extrinsic. Both are important to how your life will develop so neither can be ignored. If you are going to get the most out of your time, we need to optimize both. Said another way, the only way you can make the right decision is by correctly measuring your opportunity costs. Next we will unpack how to think about your time and explain how this concept can help you become wealthy.