What is an Opportunity Cost?
Opportunity cost is an economics concept with huge implications in every aspect of our lives. To put it simply, when you say “yes” to one thing, you are saying “no” to another.
Opportunity Cost in the Real World
Let’s try an example. Say your goal is to build healthier habits by exercising every day. When you wake up in the morning, you can either get up to exercise as you planned, or you can go back to sleep to get more rest. Both exercise and adequate sleep are important, and you only have time to do one this morning.
So which do you say “yes” to, and which do you say “no” to? There’s no correct answer. And only you can decide which is more important to you at that point in time.
Think about opportunity cost in terms of how you spend your time. In each moment, you can only be in one place doing one thing. There is always an opportunity cost of the other things you could be doing.
Opportunity Cost of Your Money
Opportunity cost is a helpful concept for thinking about how you spend your money. If you spend a dollar on one thing, that dollar is not available to spend on something else (or to save or invest).
But this isn’t about shaming you for spending—it goes both ways. When you save in a retirement account or invest in the stock market, that money usually isn’t available for your immediate needs and wants. That’s another opportunity cost. Those dollars can only be used for one thing.
Consider the Big Picture
So does this mean you shouldn’t save or invest, because that money won’t be available for other things? Of course not! When thinking about opportunity cost, I want you to make all financial decisions with the bigger picture in mind (what you’re saying “no” to by saying “yes” to something else).
When I leave my home and pull up directions for how to get somewhere, the app tells me the fastest route. It doesn’t tell me that the longer route (which takes a whole eight minutes more of my time) takes me along a beautiful reservoir that fills my heart with joy. Most days, I’m willing to give up that eight minutes.
Saundra Davis is a nationally recognized financial coach and educator. Her experience in the U.S. Navy, where she made every money mistake possible, and her 20 years serving community-based organizations led her to the reality that the best way to help people find a path out of poverty is to help them become their own financial expert.