The concept of opportunity cost might be the most important financial lesson you teach your children

Imagine if you bought shares in a blue-chip share that consistently grew at below-market rates.

It wouldn’t matter, would it? Because if the company kept paying you a dividend, this underperforming share would actually be making you money, rather than costing you money, right?

Technically, the answer is yes. But in a more practical sense, the answer is no. If you’d invested the same sum in a share that grew faster and/or paid a higher dividend, you’d be making even more money.

This is an example of ‘opportunity cost’ – all those possible investment opportunities you lost when you decided to invest in that particular blue-chip share.

Opportunity cost might very well be the most important financial lesson you teach your children.

The longer you stay on the wrong path, the higher the price you pay

Opportunity cost affects everyone, but it’s particularly relevant to older teenagers and young adults, because the decisions they make at that age will affect them for decades to come.

If your children enrol in a particular university course or choose a particular entry-level job – they’re foregoing the opportunity to study a different degree or to begin their career in a different role. That’s fine if they’ve made the right choice – but, worrying if another option would’ve given them better career opportunities.

Of course, it’s never too late to study another degree or move to another company. But the longer you stay on the wrong path, the harder it becomes to switch to the right one and the more of a price you pay.

The sooner you get on the right path, the higher the return you enjoy

Opportunity cost is also relevant to the financial decisions your children make. For example, imagine this hypothetical scenario:

• Your child starts investing $200 per month in the share market today
• They continue making this monthly investment for the next 50 years
• They reinvest all their dividends
• They earn an average return (capital gains plus dividends) of 10% per annum (which was the average annual return of the All Ordinaries from 1917-2019, according to the Reserve Bank)

In that case, their portfolio would be worth $3,382,630 after 50 years.

But if they started five years later, and therefore, invested for only 45 years, their portfolio would be worth $2,090,340 – a difference of almost $1.3 million.

A similar story would play out if we talked about your children entering the property market or salary-sacrificing into super or starting a business.

Why it’s vital for your children to understand opportunity cost

The moral to the story is that the decisions your children make today – in terms of how they allocate their time, who they network with, how they manage their money, what educational opportunities they pursue, and what career decisions they make – will compound in the years and decades ahead.

If you would like to have a confidential discussion about your family wealth, speak to Affinity Private Advisors today by calling 1300 769 304, emailing enquiries@affinityprivate.com.au or filling in this online form.