Opportunity cost is defined as the loss of potential gain from other alternatives when one alternative is chosen. In its essence it means that if you spend your time and/or resources on one event, you can no longer spend it on another. Today, after the longest stock market bull run in history, an investor may decide to shift her investments out of stocks to cash in order to reduce risk. In this example, the opportunity cost is potential investment returns of staying invested in the stock market.
Nearly every decision we make include trade-offs. You have heard that the cost of something is what we are willing to pay, or give up, to get it. And while money is a focus on our FI journey, it isn’t the only thing we should consider when faced with a decision. Fiology Lesson 11 encouraged us to Let Our Values Guide Our Decisions. The same thing applies here. Being aware of the concept of opportunity costs, we are able to analyze and understand the impact our choices have on our bottom line and our quality of life, which should be guided by our values system.
The purpose of this lesson is to introduce and discuss the concept of opportunity costs so that our understanding of our decisions can be more complete, leading to more intentional future decisions.
Read: Everything in Life Has an Opportunity Cost by Nagesh Balludi of rightattitudes.com
Watch: Opportunity Cost | The Road Not Taken by EconClips of econclips.com on YouTube
Read: The Formula of Opportunity Cost & How to Calculate It by Stash Team of learn.stashinvest.com
Read: Early Retirement and Opportunity Cost by Harry Sit of thefinancebuff.com
Listen: Opportunity Cost – The Economic Lowdown Podcast Series, Episode 1 by Federal Reserve Bank of St. Louis of stlouisfed.org
Take Action: Think about the last purchase you made above $1,000. List some of the opportunity costs of that purchase. Were those in line with your values and goals? Did it contribute to your happiness?
Read: Opportunity Cost and The Concept of Enough by Harry Sit of thefinancebuff.com
Read: The Opportunity Cost Fallacy by Doc G of diversefi.com
Quote: “Intelligent people make decisions based on opportunity costs.” – Charlie Munger