Liz Koh: Consider that other option, too

By Liz Koh


Have you ever wondered whether you have made the right choices in life? How different your life could have been if you had made different decisions, and what you are missing out on now?

In economics there is a term called "opportunity cost" - the value of the next best choice you give up when you make a decision. Imagine winning $100,000 on Lotto.

You could pay off your mortgage, buy a business, or take your family on a six-month holiday around the world. If you choose to pay off your mortgage, the opportunity cost is the value to you of the next best choice you could have made. Continuing to own something of lasting value also means you are continuing to incur an opportunity cost; you are missing out on the value you would receive if you sold your asset and used the money for something else instead.

A combination of emotional ties and complacency can prevent us from making objective decisions about keeping or selling things we own. There are times when it is appropriate to stand back and think about alternatives.

For investment assets such as property, bonds and shares, there is an easy test that helps uncover whether you should continue to own them.

Calculate roughly the dollar value of the assets.

Now, imagine you had that amount of money in your bank account in place of the assets. What would you do with that money? Would your first priority be to buy the assets you currently own?

Are there alternative uses for the money that would either enable you to enjoy life more or provide a better financial return? If the answer is yes, you may be missing out on an opportunity.

Liz Koh is an authorised financial adviser. The advice given here is general and doesn't constitute specific advice to any person. A free disclosure statement can be obtained by calling 0800 273 847.

- Hamilton News

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