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2015 401k Contribution Limits

401k contribution limits are established each year by the IRS as provided in the Internal Revenue Code.

In 2013 and 2014, the regular 401k contribution limit was set at $17,500 up from 2012′s 401k contribution limit of $17,000.  401k contribution “catch up” limits (for folks over 50) have remained flat at $5,500 over this period.

Referred to as “cost of living adjustments”, these raises are usually announced at the end of October of  the preceding year (last year they were announced on October 31st).

The Traditional and Roth 401k contribution limits are expected to be raised to $18,000 for 2015 (2015 catch up limits will likely remain at $5,500 for those over 50) but we will not know for sure until the IRS makes their formal announcement in October.  Stay tuned!

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2015 IRA Contribution Limits

IRA contribution limits are set each year by the IRS as provided in the Internal Revenue Code.

In 2013 and 2014, the regular IRA contribution amount was set at $5500 up from 2012′s IRA contribution limit of $5000.  IRA contribution “catch up” limits (for folks over 50) have remained flat at $1000 over this period.

Referred to as “cost of living adjustments”, these raises are usually announced at the end of October of  the preceding year (last year they were announced on October 31st).

The Traditional and Roth IRA contribution limits is expected to be raised to $6000 for 2015 (2015 catch up limits will likely remain at $1000 for those over 50) but we will not know for sure until the IRS makes their formal announcement in October.  Stay tuned!

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Starting Your Own Aerial Drone Business

aerial droneOne of the hottest small business ideas in the United States today involves using unmanned aerial vehicles (UAVs) drones for photography and video.  Videos and photos taken from drones have become very popular in real estate listings and the practice has carried over into other industries as well such as wedding photography, film making and advertising.  The cost of entering into the business is relatively minor and the return on investment can be very rewarding.  However, entering into this business does not come without some risks…the highest risk being that fact that using drones for profit is illegal according to FAA rules!

How Much Do Aerial Drones (UAVs) Cost?

Believe it or not, you can by a highly sophisticated aerial drone equipped with HD picture and video capabilities for less than $2000 dollars.

How Much Can You Make Using Aerial Drones?

From our research, most aerial drone operators seem to charge between $200-400 per flying hour with a set minimum fee (since most drones can only fly for 10-15 minutes at a time).  Some wedding photographers are offering aerial photos and videos as part of their wedding packages from a few hundred to over one thousand dollars.  Obviously, the return on your investment can be quite substantial.

What License Do You Need to Operate an Aerial Drone (UAV)?

Currently, the FAA does not require any kind of special license to operate a drone, however, this may change once when the FAA considers the use of drones for commercial purposes later this year or in 2015.

Is It Legal to Use an Aerial Drone (UAV) for Commercial Purposes?

While starting a small business using aerial drones sounds like a no-brainer, there is one “small” problem overshadowing an otherwise lucrative industry.  According to the FAA (Federal Aviation Administration) the use of remote controller aircraft (including aerial drones) for commercial purposes is illegal.  The FAA is expected to loosen the rules on aerial drones in the near future to include using them for commercial endeavors, but it is likely to involve the issuance of licenses and/or permits.

Should You Get Into the Aerial Drone Business?

Well many people have had success operating UAVs for profit, the activity is illegal according to federal law.  With that said, the FAA is under a lot of pressure to revise its laws regarding the use of remote controlled aircraft for business purposes and will most likely lift or at least modify its regulations within the next year.  In the meantime, you can get a head start on the competition by practicing with your drone now and offering your services free of charge to family and friends that way you’ll more experience when (and if) the FAA makes it legal for such business to exist.  Good luck!

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We Bought a Boat!

grady white
“The two happiest days of your life are the day you buy a boat and the day you sell it!” – Anonymous

When it comes to personal finance websites and blogs, the last thing you might expect to read is an article about how the author just bought a boat! However, that is exactly what is happening here at Trees Full of Money after my family and I decided it was time for us to purchase a used Grady White Tournament 205 (pictured above).

If you’re familiar with boats at all you’ve probably heard that owning a boat is like having a big hole in the water that you throw your money into, or maybe the one that says “BOAT” stands for ‘BOut Another Thousand”. I’ve even written on this very blog about the advantages of renting a boat over buying one. But, sometimes you just need to experience things yourself and that is exactly what I’m going to be doing here on my blog.

Over the next year or two, I plan on detailing exactly what it costs to own and operate an average sized family boat on the Coast of Maine to help readers decide whether or not boat ownership is right for them. I plan on detailing exactly how much it costs for boat maintenance, fuel, boat insurance, marina fees/slip rental, winter storage, as well as any other expenses that I don’t even know about yet.

The fun part will be contrasting these boat operating costs and expenses with the amount of time we actually use the boat (dollar per hour used). It should be a fun experience and I’m sure I’ll learn a lot; hopefully you will too!  Come back often for updates on all of our boating adventures (and expenses).

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“Should I pre-buy my home heating oil this year”…

Pre-paying for home heating oil is one of the most common questions I receive each year on my personal finance blog.  As many of my long time readers know, I’ve been very successful in predicting home heating oil prices over the last 6 or 7 years and readers keep coming back each fall to get my recommendations for the upcoming winter heating season. To help aid in this decision, I am once again offering my home heating oil price predictions for the fall of 2014 and winter of 2015.

Historically, pre-buying home heating oil via pre-paid or pre-purchase contracts, can be a great way to save money on heating oil costs during the cold winter heating season. However, if you’re not fully aware of the risks, you can also end up paying way too much money for heating oil as many consumers found out in 2008. In extreme cases, you can even lose your entire upfront payment as residents of Mid-Coast Maine found out when their local heating oil delivery company filed for bankruptcy.

In last year’s heating oil price prediction analysis, I recommended NOT to prebuy your heating oil contract unless you could lock in a price of $3.29-$3.39 per gallon of heating oil.  In my particular area, the cash or spot delivery price of heating oil was actually less than what the per gallon “pre-buy” price was!

Before I provide this year’s recommendation on whether or not you should lock in today’s home heating oil prices for 2015, here is a quick review of some of the more common payment options offered by many local heating oil delivery companies.

The Spot Delivery or “Pay As You Go” Plan:

This plan means that you pay whatever the current cash price is for heating oil for the day it was delivered. This plan is excellent is you know for sure the price of oil will remain unchanged or even drop over the course of the heating season. Unfortunately, the price of oil has been so volatile over the last few years that making this prediction with any level of confidence is nearly impossible.

The Monthly “Budget” or Price Protection Plan:

This plan has been my favorite over the last few years. You sign a contract for the delivery company to deliver oil to your home for the entire heating season. The best part about most budget plans is they offer a “cap” or “price ceiling” on the price you pay per gallon, but unlike “pre-buying” contracts, if the price of a gallon of oil goes below the price per gallon you budget for you get the advantage of paying the lower price. As an added advantage, your payments are spread out evenly over a 10-12 month period so that you are not faced with gigantic heating bills during the coldest months of January and February.

The Pre-Buy or Pre-Pay Plan:

When you pre-buy or pre-pay your home heating oil, you pay for your home’s total estimated oil usage for the entire winter season upfront. The price you pay is usually competitive with the current spot delivery prices on the day you sign your contract. Pre-buy plans are excellent if you have the funds available, and expect the price of oil to rise over the winter season.

Should You Prebuy your home heating oil for the 2014-2015 winter heating season?

Although I’ve been fairly accurate in my predictions over the last few years, this year’s  prediction still comes with several cautions.

First, after observing what my father-in-law experienced three years ago when the oil delivery company he pre-paid filed for bankruptcy and he lost the balance in his account, I have come to appreciate the value of being able to “hang on to your money“. Before considering prepaying for my home heating oil, I would absolutely want to make sure that the company I was dealing with had a solid track record and was well grounded in the local community.

Second, like last year, the price of a gallon of oil is trading approximately in the middle of the range it has fluctuated in over the last few years which means that in a “perfect market” the price of oil has just about as good a chance of going up as it does of going down.

When oil prices are historically low (as they were in 2009), you can make a reasonable bet that pre-buying your heating oil (at a slight discount under current cash prices) will offer you the best price protection. However, when prices are historically high (as they were in 2008 at over $4.50 per gallon) I tend to shy away from pre-buying contracts as there is very little upside in price but plenty of room (historically) for the prices to go back down especially in 2014 and 2015 where increases in domestic oil production has helped increase supply and taken out some of the “speculation” that has been seen in oil prices of the past.

Like last year, with prices in the “middle” of the two extremes I have less confidence in making an accurate prediction of whether or not you should pre-buy your heating oil for the 2014/2015 heating season. As of today (8/14/14), my local heating oil company is charging $3.69/gallon for their pre-buy prices (current “spot rate” or “day rate” is only $3.54/gallon).  In addition to this $0.15/gallon premium to pre-buy oil, my local oil delivery company is charging $0.25/gallon for “downside protection” to protect you if the price of oil actually does drop while you are still receiving your pre-bought deliveries.

In other words, I would end up paying $3.94/gallon to pre-buy my home heating oil vs. paying only $3.54/gallon to fill up my tank today.  The only way I would come out ahead pre-buying my heating oil (with downside protection factored in) would be if the “spot price” of heating oil rose above $3.94/gallon.  I just don’t see a reasonable situation where heating oil rises above $3.94/gallon during the fall of 2014 and winter of 2015. 

Several years ago it made sense to pre-buy your home heating oil, however, oil delivery companies are capitalizing on consumer’s new perception that “it always makes sense to pre-buy heating oil” by actually charging more to pre-buy the oil vs. paying the daily delivery price when you need the oil.  This just doesn’t make sense.

For the 2014-2015 heating season, I will only pre-buy if I can lock in at a price less than $3.34/gallon, and I will never pay for downside protection.  In my opinion, buying downside protection insurance when you pre-buy home heating oil defeats the whole purpose of pre-buying your oil.  The delivery company is basically selling you “insurance” on your investment to pre-buy oil.  Its almost like buying GAP insurance on your vehicle when you bought the car with cash (GAP insurance pays the difference between what you owe on the car and what the car is worth should it be totaled in an accident).

An alternative method to protect yourself from rising heating oil prices.

As always, if you’re interested a more “advanced” method of hedging against the rising cost of home heating oil prices, check out my article on how to hedge against rising gasoline prices, except instead of buying gasoline ETF (electronically traded funds), you protect yourself by buying home heating oil ETFs (I like ticker symbol UHN).

Also, if you’re interested in learning about how offshore oil and gas wells are drilled, check out my article on an introduction to drilling offshore oil and gas wells.

Thanks, and please leave your comments and thoughts in the comments section below!

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foreign tax credit, korea, germany, uk, switzerland

 

Last year I had the opportunity to work in South Korea helping to oversee the construction of my company’s new ship (pictured above).  It was a once in a lifetime opportunity, and one that I will not soon forget.

While living in South Korea (on a 4 week on 4 week off rotation) and working at the local shipyard, my company was paying income taxes on my behalf to the Korean government in addition to the US Federal  and Maine State income taxes that were already being withheld from my paycheck.  Normally, this double taxation would be a tremendous burden on US workers like me; however, thanks to the Foreign Tax Credit provision in the US Tax Code, taxes paid to foreign governments on behalf of US residents are eligible to be returned to them on a dollar for dollar basis in the form of a tax credit.

In cases like mine, US residents working in a foreign country come out ahead with foreign tax credits because they’re not actually paying the taxes (their companies are) yet they get to keep the money that is credited back to them.  But don’t spend that tax return before you get it, as I found out, you don’t actually get back all the money that your company paid on your behalf.

Foreign Tax Credit Example:

To keep this example simple, lets assume your gross income last year was $100,000 and your company paid 15% or $15,000 in foreign income taxes (on your behalf) to the country you worked in.

If your company hadn’t paid any foreign taxes on your behalf at all, you would be responsible for paying taxes on the $100,000 minus any deductions and personal exemptions you qualified for.

However, since your company paid taxes on your behalf, your gross income is actually “grossed up” to show you earned $115,000 (the $15,000 difference reflects the additional money your company paid on your behalf to the foreign country).  You are now responsible for paying taxes on $115,000 minus any deductions and personal exemptions you qualify for.  You will most likely qualify to get the $15,000 back in the form of a credit, but you’ll also have to pay federal and state taxes on $15,000 because it is effectively considered “income” per the IRS forms.

This means that all other things being equal, you’ll only come out ahead by $9,000 to $11,000 with a $15,000 foreign tax credit vs. your company not paying any foreign taxes on your behalf at all.

This post is provided to give you a general idea of how foreign taxes applied to my own unique case.  I recommend you do as I do and consult a licensed tax professional who is experienced in the area of foreign tax credits before actually filing your taxes.  Good luck!

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So…You Want to Buy a Ski Condo

Last month my wife and I took our three kids on a family ski vacation to the Sugarloaf, USA ski resort in Maine to research ideas for some upcoming articles.  After exploring various lodging options we chose to rent a two bedroom “on mountain” condo in a family friendly condominium association that also had a “free” pool our kids could use.  To make a long story short, we had the time of our lives.  It wasn’t just the great skiing (which was amazing), but the whole atmosphere that surrounds the mountain, the outdoor activities,  and the friendliness of the people.

Naturally, my wife and I got thinking about how nice it would be to someday buy a condo unit of our own.  I wasn’t new to the idea, I’ve written articles on both the advantages and disadvantages of buying vacation properties, but now that we had developed an interest in a particular area, it was time to put my theories to the test.

As luck would have it, the exact unit we had rented for the week happened to be for sale with a list price of $179,000.  We weren’t in a position to make an offer, but it was interesting to compare the list price of the property to what we could rent the property for (we paid $1500 for the week).

After analyzing the numbers, we quickly realized that unless we used the unit nearly every weekend during the winter months (probably not going to happen with all of our kids extra-curricular activities), the numbers just weren’t in favor of us buying the property, here’s why:

Killer Maintenance Fees: The first thing that struck us was the monthly “maintenance” fee of $309 (as noted on the real estate listing) or $3709/yr.  For that price, I could rent the property for two weeks out of the winter and still have money left over for lift tickets without ever having to pay a single mortgage payment.

Heating Bills: The second thing that struck us was the monthly heating bill.  According to the listing sheet, the property we stayed in averages about $1700 a year in heating costs (between electric and propane). That’s another expense we don’t have as renters and translates into another week’s stay at the condo as renters without ever having to make a mortgage payment.

Interest: The third consideration was the interest we’d have to pay on the property if we bought it.  Assuming a 20% down payment, we’d be looking at over $7,000 a year in interest payments.  Again, there’s 4 more weeks we could have just rented the property and come out ahead.

Appreciation: Last but not least, we realized by looking at recent sales data for units within the condo association, the properties have seen very little (if any) appreciation over the last 6 years.  With such high costs of ownership vs. renting, it is unlikely that there will be any significant appreciation in the following years either.

Of course, there are plenty of advantages of buying a ski condo, however, from a purely financial standpoint, I think we’re going to pass on this particular opportunity.

 

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log-cabin

Vacation homes are great!  For many families and individuals, purchasing a vacation property is the realization of a lifelong dream. Few things are more rewarding than kicking back in your own personal slice of heaven with friends and family in an area you hold near and dear to your heart.

Unfortunately, most families are unable to afford the “lifestyle” associated with owning a second home.

Whether your dream is to own a lakeside cabin in Maine, or a ski house in Colorado, here are 8 reasons why renting a vacation property may be a better option for you. [click to continue…]

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target, security, breachWith a public perception that was once the envy of all discount retailers, Target Corporation is in serious damage control mode following the debit card and credit card security breach that has affected millions of customers. As part of its mea culpa, Target is offering one year of free credit monitoring through Experian’s “Protect My ID” service. The following benefits are included as part of Experian’s “Protect My ID” credit monitoring package:

Credit Report: You will get a free copy of your Experian® credit report.

Daily Credit Monitoring: You will receive alerts regarding key changes to your credit report, including new inquiries, newly opened accounts, delinquencies, or medical collections reported on your Experian®, Equifax® and TransUnion® credit reports for one year.

Identity Theft Resolution: If you have been a victim of identity theft, you will be assigned a dedicated, U.S.-based Experian® Identity Theft Resolution Agent who will walk you through the fraud resolution process from start to finish.

Identity Theft Insurance: If you have been a victim of identity theft, you will immediately be covered by a $1 Million insurance policy that can help you cover certain costs, including lost wages, private investigator fees, and unauthorized electronic fund transfers for one year.

ExtendCARE: You will get full access to personalized assistance from a highly-trained Fraud Resolution Agent even after the initial one year ProtectMyID™ membership expires.

If your information was compromised as part of the Target data breach, you can easily register through Target’s website to have a free Protect My ID activation code emailed to your inbox.

The question, of course, is if this “free” service is worth the hassle of signing up considering you need to provide your personal information including your Social Security Number (after all, isn’t this what got us all here in the first place)?

Although it is not an ideal situation for anyone involved (except maybe the criminals who stole your information), I believe the Experian credit monitoring service is a very worthwhile step to take if you are concerned about someone using your identity to commit fraud. Experian, as you may know, is one of the three major credit monitoring bureaus (the other two being TransUnion and Equifax) and is not part of Target; Experian, along with the other two credit bureaus is arguably best positioned to contain the fallout of this security breach.

The one caution I have for you is that Experian is also a “for profit” business and will attempt to sell you several additional products and services as “add-ons” to your free credit monitoring service (these add-ons include access to your credit scores, FICO/credit  score tips, credit score monitoring services, etc.). My advice is to simply pass on these offers and focus on the free services included in the “Protect My ID” package first.  The services already included in the Protect My ID product should be more than enough to control anyone from causing permanent damage to your credit file.

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UPDATE:  You can read my recommendations for this year’s heating oil prebuy advice (the fall 2014 and winter 2015) here.

“Should I pre-buy my home heating oil this year”…

This is one of the most common questions I receive each year on my personal finance blog.  As many of my long time readers know, I’ve been very successful in predicting home heating oil prices over the last 5 or 6 years and readers keep coming back each fall to get my recommendations for the upcoming winter heating season. To help aid in this decision, I am once again offering my home heating oil price predictions for the fall of 2013 and winter of 2014.

Historically, pre-buying home heating oil via pre-paid or pre-purchase contracts, can be a great way to save money on heating oil costs during the cold winter heating season. However, if you’re not fully aware of the risks, you can also end up paying way too much money for heating oil as many consumers found out in 2008. In extreme cases, you can even lose your entire upfront payment as residents of Mid-Coast Maine found out when their local heating oil delivery company filed for bankruptcy.

Predicting home heating oil prices for the upcoming winter heating season has become one of the most popular series of articles each year on my personal finance blog Trees Full of Money.

While I provide this service for entertainment purposes, I am proud to say that I have developed an exceptional track record over the last 5 years in recommending the most beneficial payment option provided by most major heating oil delivery companies in the northern regions of the United States.

In last year’s heating oil price prediction analysis, I recommended NOT to prebuy your heating oil contract unless you could lock in a price of $3.35-$3.65 per gallon of heating oil.  In my particular area, the cash or spot delivery price of heating oil was actually less than what the per gallon “pre-buy” price was!

Last spring (2012), heating oil was hovering around $3.70-$3.80 yet my local heating oil delivery company wanted to charge me $3.89 per gallon for a pre-buy contract!  If I’m going to pre-buy my oil, AT THE MINIMUM, I expect a discount just for the simple fact that I’m paying the money upfront and there is no risk to the delivery company that I won’t pay as agreed (most home heating oil deliveries are made on credit where the homeowner in billed after the delivery is made.  Not to mention the oil company is earning interest on my money.

Before I provide this year’s recommendation on whether or not you should lock in today’s home heating oil prices, here is a quick review of some of the more common payment options offered by many local heating oil delivery companies.

The Spot Delivery or “Pay As You Go” Plan:

This plan means that you pay whatever the current cash price is for heating oil for the day it was delivered. This plan is excellent is you know for sure the price of oil will remain unchanged or even drop over the course of the heating season. Unfortunately, the price of oil has been so volatile over the last few years that making this prediction with any level of confidence is nearly impossible.

The “Budget” or Price Protection Plan:

This plan has been my favorite over the last few years. You sign a contract for the delivery company to deliver oil to your home for the entire heating season. The best part about most budget plans is they offer a “cap” or “price ceiling” on the price you pay per gallon, but unlike “pre-buying” contracts, if the price of a gallon of oil goes below the price per gallon you budget for you get the advantage of paying the lower price. As an added advantage, your payments are spread out evenly over a 10-12 month period so that you are not faced with gigantic heating bills during the coldest months of January and February.

The Pre-Buy or Pre-Pay Plan:

When you pre-buy or pre-pay your home heating oil, you pay for your home’s total estimated oil usage for the entire winter season upfront. The price you pay is usually competitive with the current spot delivery prices on the day you sign your contract. Pre-buy plans are excellent if you have the funds available, and expect the price of oil to rise over the winter season.

Should You Prebuy your home heating oil for the 2012-2013 winter heating season?

Although I’ve been fairly accurate in my predictions over the last few years, this year’s  prediction still comes with several cautions.

First, after observing what my father-in-law experienced three years ago when the oil delivery company he pre-paid filed for bankruptcy and he lost the balance in his account, I have come to appreciate the value of being able to “hang on to your money“. Before considering prepaying for my home heating oil, I would absolutely want to make sure that the company I was dealing with had a solid track record and was well grounded in the local community.

Second, like last year, the price of a gallon of oil is trading approximately in the middle of the range it has fluctuated in over the last few years which means that in a “perfect market” the price of oil has just about as good a chance of going up as it does of going down.

When oil prices are historically low (as they were in 2009), you can make a reasonable bet that pre-buying your heating oil (at a slight discount under current cash prices) will offer you the best price protection. However, when prices are historically high (as they were in 2008 at over $4.50 per gallon) I tend to shy away from pre-buying contracts as there is very little upside in price but plenty of room (historically) for the prices to go back down.

Like last year, with prices in the “middle” of the two extremes I have less confidence in making an accurate prediction of whether or not you should pre-buy your heating oil for the 2013/2014 heating season. As of today (10/9/12), my local heating oil company is charging $3.79/gallon for their pre-buy prices (current “spot rate” or “day rate” is only $3.59/gallon).  In addition to the $0.20/gallon premium to pre-buy your oil, my local oil delivery company is charging $0.25/gallon for “downside protection” to protect you if the price of oil actually does drop while you are still receiving your pre-bought deliveries.

In other words, I would end up paying $4.04/gallon to pre-buy my home heating oil vs. paying only $3.59/gallon to fill up my tank today.  The only way I would come out ahead pre-buying my heating oil (with downside protection factored in) would be if the “spot price” of heating oil rose above $4.04/gallon.  I just don’t see a reasonable situation where heating oil rises above $4.04/gallon during the upcoming heating season. 

Several years ago it made sense to pre-buy your home heating oil, however, oil delivery companies are capitalizing on consumer’s new perception that “it always makes sense to pre-buy heating oil” by actually charging more to pre-buy the oil vs. paying the daily delivery price when you need the oil.  This just doesn’t make sense.

For the 2013-2014 heating season, I will only pre-buy if I can lock in at a price less than $3.39/gallon, and I will never pay for downside protection.  Buying downside protection insurance when you pre-buy home heating oil defeats the whole purpose of pre-buying your oil.  The delivery company is basically selling you “insurance” on your investment to pre-buy oil.  Its almost like buying GAP insurance on your vehicle when you bought the car with cash (GAP insurance pays the difference between what you owe on the car and what the car is worth should it be totaled in an accident).

An alternative method to protect yourself from rising heating oil prices.

As always, if you’re interested a more “advanced” method of hedging against the rising cost of home heating oil prices, check out my article on how to hedge against rising gasoline prices, except instead of buying gasoline ETF (electronically traded funds), you protect yourself by buying home heating oil ETFs (I like ticker symbol UHN).

Also, if you’re interested in learning about how offshore oil and gas wells are drilled, check out my article on an introduction to drilling offshore oil and gas wells.

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One of the interesting concepts I’ve learned in business school is the opportunity cost of capital and how it relates to investment decisions made by financial managers at public corporations.

In a nutshell, the opportunity cost of capital (expressed as a percentage) is the expected investment rate of return a company gives up for a certain amount of money invested in the financial markets when it instead decides to invest the money in the itself (development of a new product or service).

For example, let’s pretend that a pharmaceutical company has $1 billion sitting in their coffers. The company could return that money to shareholders in the form of dividends, they could invest that money in the financial markets (in stocks, bonds, treasuries, etc.), or they could reinvest that money in the company by perhaps researching, testing, and marketing a new drug.

Assuming the company decides not to pay a dividend to the shareholders (so the shareholders can reinvest the money themselves), financial managers within Pfizer must identify new projects that offer a higher rate of return than what they could get if they simply invested the money in the financial market (this being the opportunity cost of capital).

The trick with the opportunity cost of capital is making sure you compare the expected rate of return of a new investment project with the rate of return in the financial markets of an investment vehicle of similar risk (this is where a great deal of experience, guessing, and arguing comes into play among a corporation’s management, board of directors, and shareholders).

If it appears the company’s new invest project yields a higher expected return vs. investing company funds in the financial markets at a similar risk level, then it makes since to move ahead with the company’s new project.

On the other hand, if the expected rate of return on the proposed project is less than what the company could earn if it simply invested the money in the stock market, bonds, or treasuries, then it wouldn’t make sense to continue on with the proposed investment project.

How Does the Opportunity Cost of Capital Affect You and Your Personal Finances:

If you’ve been reading this blog for a while, you’re probably aware that I like to think a little differently when it comes to personal finance, investing, paying off debt, and saving. Considering the opportunity cost of capital as it relates to your everyday finances is another great example of this.

Let’s say you decide to purchase a new vehicle for $30,000. Not only is that $30,000 vehicle going to depreciate more than $15,000 in three years (most likely), you’ll also have missed out on the opportunity to have invested that money in the financial markets.

In three years, not only would you have lost $15,000 in the form of depreciation, you also would have lost out on the compounding interest you could have earned by investing that $30,000 in a highly rated bond corporate or government bond paying around 6% (as of this writing). This lost investment opportunity amounts to another $5,730 (30000 X 1.06^3 = $5,730).

Your opportunity cost of capital in this case would be the $5,730 you gave up by instead deciding to purchase the new car. I’m not saying you shouldn’t buy a new car (in fact I just bought one a few months ago), what I do think you should consider is how much that vehicle is really costing you in the long run.

I hope this gives you a little more food for thought the next time you consider making a big financial purchase.

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