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You Are Here: Home » Personal Finance » What Is The Opportunity Cost?

What Is The Opportunity Cost?

Published or updated April 14, 2010 by Glen Craig

The term “opportunity cost” is thrown around a lot but many people don’t fully understand the concept.

Opportunity Cost can be defined as

the cost of something in terms of an opportunity forgone…or the most valuable foregone alternative (Wikipedia).

Basically, everything you do has an opportunity cost which is what you are giving up for what you are doing.  If you sleep late, the opportunity cost is whatever you may have done in the morning instead.  When you buy something the opportunity cost of the item is whatever else you could have done with that money (or even with your time shopping for the item).

Why is this concept important? Whenever you make a decision, be it with money, life, whatever, you should look and see what the opportunity cost of that decision is.  This makes you stop and think about whether what you are about to do is worth it.  Is there a better action?  Is my time better served?  Can my resources be better used?   These are questions that should cross your mind.

In terms of personal finance this is looking at what you do with your money and figuring out it’s true worth to you.  See, an important aspect here is what your values are.  Is it better for you to redo your kitchen or put more money away for retirement?   There isn’t necessarily a “right” answer for this.  The decision is yours.  You should be aware of what other opportunities you will miss when you make your decision.

Try to think about the things you do today and figure out the opportunity costs.  Will it change any of your decisions?

Let me know.

Filed Under: Personal Finance Tagged With: cost, opportunity cost, Personal Finance, Tips

About Glen Craig

Glen Craig is married and the father to four children that he spends the day chasing as a stay-at-home-dad. He took an interest in personal finance when he realized most of his paycheck was going toward credit card bills. Since then he's eliminated his credit card debt and started on a journey towards financial freedom.

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Glen CraigI'm Glen Craig - I used to live paycheck-to-paycheck, drowning in credit card debt. I turned that all around and now I build wealth rather than debt.

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