Date: 2026-07-01, Wednesday, 02:31 PM
Tags: Learn new financial topics
It is basically what my earned money needs to go through right after earning it.
I need to decide what gives me the highest return, what is guaranteed, etc.
For example, say I own an e-commerce, and I earn Rs. 1 Lakh as profit, that money can go through:
- Reinvest in stocking up the inventory
- Pay any business debt
- Invest in Stock Market
- Hold it as a cash buffer
If my e-commerce is booming, I could reinvest the money in the business. Say, it gives me a 20 to 30% return on my money. But the returns are not always guaranteed.
If I’m currently paying 11% interest in the debt, paying the debt would give me 11% return, and that’s guaranteed, cause I will not longer have to pay the 11% interest anymore. One thing to note is reinvest the money in the business isn’t guaranteed to give me high returns, if it is sometimes -10% (loss), it’s better to pay up the debt which has a 100% guarantee.
Investing in stock market can be risky.
Holding as a cash buffer does not provide financial return, but does provide a sense of emotional relief (I can be rest assured that I have cash with me and have a safety net).
If I am a salary person, I would do the similar:
- Reinvest in skills
- Savings, etc
I further asked Claude, and below is that notes:
- Opportunity Cost:
- The value of the best alternative you gave up when you chose one option. (When I choose to spend money on X, the value that I could have got from Y is now lost).
- If you put your Rs. 1 lakh into inventory, and the next best thing you could’ve done was pay off debt at 11%, your opportunity cost of choosing inventory is 11%.
- Opportunity cost only ever refers to your single best forgone alternative — not all of them added up. If you had 4 options and picked one, opportunity cost = the return of the second-best one, not the sum of the other three.
- Another example: Like, say I buy a mobile phone at Rs. 50K, the Opportunity Cost could be 10% if the second best option was investing in share market (assuming it gives me a steady 10% return).
- Opportunity Cost looks at consumption (decision was to buy phone) or investment (decision was to reinvest in business).
- Cost of Capital:
- The minimum return an investment must generate to be “worth it” — i.e., your hurdle rate.
- Say I have now Rs. 50K. There can be two sources:
- I borrowed it from bank at 6% interest
- The cost of capital is now 6% of 50K per year, cause I have to pay the 6% to use the 50K.
- I earned it from somewhere, no strings attached, it’s my money and I can use it anywhere
- Here, we measure the cost of capital by calculating what my money could have generated if I had put it in the second best option other than where I put it in actual life.
- Say I invested in share market for 10% return. Another option could have been a 3% return on savings account if I kept it in a bank. Now, my cost of capital is 3%.
- Cost of Capital looks at only investment allocation, not consumption (like decision to buy phone)
- I borrowed it from bank at 6% interest