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Welcome to the second article in the series of financial literacy. If you have not yet done so, kindly please read the introductory article on how to assess your net worth ( read it here). As always, my hope is that you become better at managing your money by the end of these series.

As you know by now, I have an commission based business of selling airtime, electricity and TV subscription. This business has a WhatsApp group where people share their issues and a typical complain on that group is that the commission that we make on the sale is too little. There are people making more money than me but I do not complain because  I am choosing to view this investment in relative terms.

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Facts

  1. I have an investment at Nampost- call account earning an tax free interest rate of 2.4% per annum with Zero bank charges. If I have (for example for argument sake) N$10 000 in that account, my interest  income for the month is N$20.  I  like it because the money is accessible at any point in time, there are zero bank charges and hence a good account to use for emergency savings purposes.
  2. I then have this airtime business. I have invested in  roughly $3000 , that I just keep recycling.  This month, I made roughly N$345 in profit and when you express that in % terms is 9.8% return per month. I like this business because there are no other costs associated with this business other than bank charges  when I do transfers.
  3. Then I actually diverted savings to the home loan. I do not get any money from paying extra on the home loan, however, I am saving 11.25% in interest accruing  on a the capital portion. Indirectly the return on this savings is 11.25%. This is a good savings considering how large the capital amount on which the interest is accruing. Plus this interest is compounded daily. ( read here to understand how interest rate works)
  4.  I  also have a stake in the chicken farm , currently yielding negative return due to the fact that with the recent drought, the chicken feed is going up and it is less profitable to be in this type of business.
  5. And I have investment in shares that I bought for N$2 500 that paid round about  N$300 in dividends and if you compute the monthly return it will give you have approximately 1%.

Opportunity cost is term used in evaluating investment decision. What could you be doing with your money if it was not tied up on the activity that you are currently spending it on?

At face value, if you do not look at it correctly, you might think putting your money on  a home loan is a bad idea but actually amongst all the above, even if I am not making any money out of it, I am actually saving a lot in interest.

So the lesson here is whenever you are faced with a decision, run it past the followings:

  1. What am I getting out on a monthly or yearly basis from this deal?
  2. If so, are there other better options I should be looking at and what can I be getting out from those other options?
  3. What are the risks attached to each decision I take?
  4. Could there be other benefits from it such as tax savings?

Benefits that are not always directly received in cash. This is why someone would opt to save in a home loan to avoid the interest that they could otherwise be charged instead of getting $200 in extra monthly.

What is the opportunity cost of your current savings ?

Be right back

Dhalondoka

 

One thought on “What is opportunity cost?

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