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The Hidden Costs That May Hurt Your Wallet

The Hidden Costs That May Hurt Your Wallet

Everything comes with a price tag.

Calculating costs is pretty straightforward (if sometimes unpleasant).

The cost of a home. The cost of starting a new business. The cost of sending a kid to college. These are easy-ish to figure out.

But I’ve been also thinking a lot about “opportunity costs.”

An opportunity cost is the benefit you could have attained had you taken a different action. So, doing x instead of y may cost you something — that something is your opportunity cost, the benefit you’re not getting.

Opportunity costs can feel more conceptual than real…which also makes them harder to calculate…so we often pay little attention to them. But we should pay attention, because they can be expensive (and by expensive, I mean life-changing).

For example: let’s say you’re working for a boss who doesn’t “get you” and all you bring to the workplace. Todd is promoted ahead of you, even though you’re more qualified than Todd. Way more qualified. But you keep working for this boss because…you know…if at first you don’t succeed and all that. You’ll make him see how great you are. But there can be an opportunity cost to persevering. It’s the promotion you’re not getting, the raise you’re not receiving, the pay gap you’re not closing.

[Related: Identifying and Fighting Unconscious Bias in the Workplace]

There’s also an opportunity cost for some of us of not having a career “sponsor.”

Sponsors are a lot like mentors, but they don’t just answer your questions; they actively advocate for you and your career. The research tells us that women tend to be over-mentored but under-sponsored in comparison to men in business. And that’s bad, because if you don’t have someone fighting for you in “the room where it happens,” it may not happen for you.

How much can these career opportunity costs set you back? Just based on the gender pay gap, it can be up to $1.3 million over your career.*

Then there’s the opportunity cost of a career break.

We think of this as the money you’re not making when you step away from the workforce. But it’s more than that, because it’s also the raises that you don’t get while you’re away, which can impact your earnings for years to come. It’s also the Social Security and 401(k) contributions you’re not making during that time.

These can cost you more than $1.7 million over your career.**

Another one is the opportunity cost of not investing.

While it can feel “safer” not to invest, we don’t believe it is; that’s because you earn very little interest from saving, and inflation can fully eat that away. If you invest, you give yourself the opportunity to earn market-like returns over time, and those historically have been quite a bit higher than interest rates on savings.

Keep your money in cash instead of investing and it can cost you $1.1 million over your career.***

What is the antidote to these costs? Knowledge first. And then, if you choose, action to close those gaps. The actions may not feel comfortable at first, but they can be quite profitable.

Learn how to close the gaps: start now

Disclosures

We assume two 30 year old women, one earning $85,000 and another earning $108,970, both college graduates. This approximates the average gender pay gap of the 78 cents a woman earns for every dollar a man earns. Both salaries are projected using a women specific salary curve provided by Morningstar Investment Management LLC and includes the impact of inflation. We add up the salaries over a 35 year period and the difference is the figure shown here as the gender pay gap, in future dollars. 

**We project an $85,000 salary for a 30 year old woman with and without a career break, using a women-specific salary curve that includes inflation from Morningstar Investment Management LLC, a registered investment adviser and subsidiary of Morningstar, Inc. We assume Elle takes a 2-year career break in 5 years, and returns to a job paying 20% less than her salary at the time she takes the break. We add up her annual salary amounts under both scenarios over a 40-year period. $1.7M is the difference between the two sums. 

***We compare the outcomes of saving 20% of an $85,000 starting salary for 40 years in a savings account with the outcomes associated with investing those savings in an Ellevest account. We assume the savings account yields a 1% average annual cash return and has no account fees. For investing, we assume an investment with Ellevest using a low-cost diversified portfolio of ETFs beginning at 91% equity and gradually becoming more conservative during the last 20 years, settling at 56% equity by the end of the 40 year horizon. These results are determined using a Monte Carlo simulation — a forward looking, computer-based calculation in which we run portfolios and savings rates through hundreds of different economic scenarios to determine a range of possible outcomes. The results reflects a 70% likelihood of achieving the amount shown or better. The investing results include the impact of Ellevest fees, inflation, and taxes on interest, dividends and realized capital gains. 

Forecasts or projections of investment outcomes are estimates only, based upon numerous assumptions about future capital markets returns and economic factors. As estimates, they are imprecise and hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. 

Information was obtained from third party sources, which we believe to be reliable but not guaranteed for accuracy or completeness. 

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. 

The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person. Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. 

Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.

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This article first appeared on Ellevest.


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