Opportunity Cost – Everything In Life Is a Trade-Off

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.

An Example

Today, after the longest stock market bull run in history (minus a few severe hiccups) an investor may decide to shift her investments out of stocks to cash in order to reduce risk.

In this example, the cost of this decision is the potential investment returns of staying invested in the stock market.

It Isn’t Always About the Money

You’ve heard the quote attributed to Henry David Thoreau:

The price of anything is the amount of life you exchange for it.

Nearly every decision we make includes trade-offs. And while money is a major focus factor on our journey to Financial Independence, it isn’t the only factor we should consider.

For instance, the desire to spend your time the way you choose may motivate you to achieve Financial Independence. Are you willing to trade-off time today for potentially more time in the future?

You may choose an inconvenient commute to a higher paying job. You can invest more assertively and likely reduce the number of your working years. As a result you may be able to spend more of your future time doing things you enjoy.

On the other hand, if you truly detest commutes, you may find the trade-off isn’t worth the hit to your current quality of life.

We should Let Our Values Guide Our Decisions. Understanding the concepts in this lesson will help you better analyze the impact choices have on your bottom line and your quality of life.

Fiology thanks Brad Barrett of Travel Miles 101 and  ChooseFI for shaping this lesson.

Read:

• Everything in Life Has an Opportunity Cost  by Nagesh Balludi of rightattitudes.com
• The Formula of Opportunity Cost & How to Calculate It  by Stash Team of learn.stashinvest.com
• Early Retirement and Opportunity Cost  by Harry Sit of thefinancebuff.com

Watch:

• Opportunity Cost | The Road Not Taken  by EconClips of econclips.com on YouTube

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 and list some of the opportunity costs of that purchase. Were those in line with your values and goals? Did it contribute to your happiness?

Additional Resources:

• Opportunity Cost and The Concept of Enough  by Harry Sit of thefinancebuff.com
• The Opportunity Cost Fallacy  by Doc G of diversefi.com

Quote:

“Intelligent people make decisions based on opportunity costs.” – Charlie Munger