The Cost of Ignorance.

I thought I would get the most sensitive (or insensitive) subject out of the way early so we can move on to the educational part of this process. It's widely understood that before you can prepare for the future it's sometimes necessary to revisit the mistakes of the past and see what we learned in hindsight.

Ignorance (or optimism and confidence as it's often called in the world of finance and academe) is what has driven this economy for the better part of a decade. The subjective outcomes of surveys used to measure this state of mind are published monthly and can rally markets which in turn rallies consumers. This intangible feeling of optimism (or foolish optimism) is what has been keeping our economy afloat. It's also hidden our economic problems and ultimately what put us in our current position. For years we spent more than we earned in a hopeless attempt to finance our way up the social ladder. God forbid we not all appear to be in the "middle class". We all knew the explicit price tag of our frivolousness, but there is another cost hidden in every transaction or decision that's usually absent in economic or political conversation. These unspoken and mostly invisible costs are known as implicit costs.

An implicit cost has no obvious price tag. The true amount of implicit costs can only be calculated if you have the education and rationality to methodically think through your decision. Even then it's an estimate at best, but an estimate is better than nothing. A good example of an implicit cost is what happens when purchasing a house you have to work a few extra hours a week to afford. The actually money you've paid to the bank is the explicit price tag. The implicit cost of your decision would be the added stress, higher blood pressure, less time with family, and all the other things doctors tell us are counter productive to our health and happiness. These costs seem obvious now right? If not then they will when those hospital bills arrive. That brings me to my point which is unanticipated implicit costs lead to more explicit costs.

Companies that are leading their industries today know how to calculate these costs and deal with them. Those that don't are no longer in business. The banking industry is the poster child for this. Today's thriving companies are becoming more profitable not because revenues are abundant, but because they learned to control costs. While this crisis has not left a single bank unscathed those who planned adequately for both what they knew, and what they knew they did not know are still here.

The point of all this is that the true costs of your decisions can never be captured on a price tag alone. Since these costs vary by your personal situation it's ultimately up to you to determine them. The ability to estimate them however is going to be directly related to how much you choose to educate yourself on the matter. The first part of this education is knowing that every financial decision you make will have these implicit costs. In this economy more income can be hard to come by, but keeping what's yours by controlling "true" costs is something every man can do.