What Does It Cost?

It is always my intent to apply critical thinking to issues and situations. There are many issues and situations in which society has conditioned us to think and act in certain ways. The way we might conditionally think and act isn’t right or wrong, but it may be. Periodically, reapplying thought to routine issues and situations might lead to improvement. We are conditioned to view the “cost” of products and services in certain ways. First off, we typically quantify cost in dollars. We don’t often think of the cost as actions or effort required to obtain the dollars needed to exchange for a product or service. There is an economic concept referred to as “opportunity cost”, whereby the cost of option #1 (product or service) is equal to what other options you are unable to obtain by choosing Option #1.

The essential purpose of a society having currency is to have a common language, or method, regarding the relative value of various products and services. One person is paid more in their career because society values what they do, more than a person in another career. Of course, there are exceptions, but the value of anything is in the eye of the beholder. In a large society, a consensus view of value develops.

Currency has dramatically improved the efficiency of our economy. Can you imagine a world without currency? The livestock farmer exchanges a pig for a refrigerator, then the appliance store owner exchanges the pig for an exercise bike. The exercise bike business owner decided their product was worth one pig, but more than a refrigerator! Luckily, for the appliance store owner who wanted an exercise bike, she found a livestock farmer that valued a refrigerator equal to their pig. This is not at all efficient and would grind our economy to a halt.

Our currency is ink on paper and has very low intrinsic value. A $100 bill is no better than a $5 bill in starting a fire. There are few intrinsic uses for currency.

My mindset regarding wealth, which is applied in our initial planning process and as ongoing advice assisting families, is focused on the utility of wealth. At speaking events over the years, I’ve stated “It’s not anybody’s goal to have a lot of money.” That statement is met with gasps, laughter, and other thoughts you may have now. I immediately follow up with this statement “It’s everybody’s goal to be able to do, what you would do, if you had a lot of money.”

In other words, you have unique needs, wants, dreams, and desires that you choose to exchange your money for. Our drive to earn money are the thoughts about what we want to exchange that money for. Have you ever been with friends or family when this question was put out there; “What would you do if you won the lottery?” Nobody talks about the numbers, but everyone talks about what they’d exchange the money for. Different interests and values!

In the financial industry, the “cost” of insurance comes to mind. I have a rather simple viewpoint on insurance of all kinds. If I can write a check for any potential economic loss, without impacting my family’s lifestyle or objectives, then I don’t need insurance protection in that situation. If the potential economic loss is too big for me to write a check, without affecting my family’s lifestyle and objectives, while the insurance premium to protect that loss is not impactful, then I buy the insurance protection.

With this mindset, the “cost” is not the dollars required to buy insurance or not. I am defining “cost” as the impact to me and my family!

I’ll leave you with another example, before I sign off! If you leave a $1 million (cash, investments, property) inheritance to your children or charity, then the cost of providing the inheritance is $1 million, or the unrealized joy in exchanging that wealth for your wants, dreams, and desires. Critical thinking leads me to ask, why would a person buy a $1 million life insurance policy for $1 million? They would not, however their choices replicate that outcome. An actual $1 million life insurance policy may provide a $1 million inheritance, for far, far, less work, less effort, and yes, less money.