Not only understanding lost opportunity cost but knowing how to recapture the capital in a
business plan is 100% the key to success. I feel that one cannot understand this after one basic
explanation. There really needs to be a deep dive. The $100 steak dinner that you have tonight, if
you would have stayed home and invested that capital somewhere are received a return, then
whatever that number comes to over whatever period that you want to measure is only part of lost
opportunity cost. Most of us feel like this is what lost opportunity is. I believe there is way more. I
believe there is the lost opportunity cost, plus the money multiplier effect. I want you to read that part again. There is the lost opportunity cost, plus the money multiplier
effect.
I am going to try to explain this with one example. This concept has taken me many years to
completely grasp. So, here goes!
We are going to take a business owners auto policy. We are going to recommend they raise their
deductibles from $500 to $5,000. By doing this, we can drop their premiums from $50,000 to
$25,000. Saving the client $25,000. If we take the $25,000 and invest it somewhere and can receive
a 6% return, then that money would grow to $974,818 and some change in 20 years.. However, the
client is taking on up to a $5,000 risk per claim. Every time there is a claim no matter the size, up
to $5,000 then the client has to pay out of pocket.
Our minds go immediately to the savings and the risk tolerance of the client, and maybe the client
can afford to take this risk. This mentally is totally WRONG! For this strategy to work and we are
going to recapture the lost opportunity, then we must place savings somewhere it can be accessed
without interrupting the growth of the capital even if there is a claim.
There is more!
The money multiplier now comes into play. As the money is growing, we can use it for other things,
such as paying for inventory or paying for a buy-sell agreement. The options are limitless, and so is
the growth of the money. This is where all traditional advisors can not come close to this type of
planning. They are simply chasing returns in the market or searching for tax deductions. Creating a
better machine and recapturing loss of capital to reinvest back into their business will beat any
other strategy every single time.
As the balance grows, the business owner now can do the same thing with other things going on
in the business and recapture more money and create another velocity. Money in motion stays in
motion. ANYTHING and EVERYTHING a business owner pays for has a lost opportunity cost
associated with it. One either gains interest or pays interest, in our case they are a wealth creator
and operate the way that bank operates.
There is more. If we interrupt the growth and use the capital somewhere else, then we did not
achieve the recapture of all the lost opportunity. The money must grow without disrupting the
compounding, and we still must be able to use the money for something else. Dividend paying,
cash value life insurance with indirect recognition has such a feature. Any other solution just does
not work the same way or requires bank loans.
The Financial Four Square was created to help advisors identify issues and recapture the lost
opportunity cost and to create money multipliers.
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