April 17, 2015
Opportunity cost is a critically important concept to understand and apply to your life. What is it? Example?
Opportunity cost is a critically important concept to understand and apply to your life. What is it? Example?
Opportunity cost is what you give up to get something, if you buy a car for $10,000, you will no longer be able to invest that money and you give up any gains that you may get from it. You need to know what you are giving up to buy something. Opportunity cost is something you should always think of when making an purchase decision. You cant always see all the opportunity costs that you have but you can always see what your investments may average over the time that you would have had that money.
Opportunity cost is the cost of an alternative that is given up in order to take another course of action. In terms of investing, your opportunity cost would be the amount of return that you could have gotten from one investment choice, while your money was invested/spent/saved elsewhere. For example, say you are looking into buying a car and you have the money to buy it outright. You also have a very good credit score and are able to get a loan on the car at 0% interest. The opportunity cost in this case would be the amount of return that you could receive from taking the loan and investing your money elsewhere, instead of paying for the car in one large sum.
Nice answers. Let’s recap.
(1) When you put money in one place, it cannot go elsewhere. Never forget this very simple fact.
(2) When looking at where to put your money, consider your interest rate (on savings or debt), and/or your future expected returns (8% on a diversified portfolio of stock and bond index funds for example).
(3) Learning how to be efficient with each dollar you have will gradually improve your financial situation as you consistently make good decisions with your money. Believe it!