Opportunity Cost

When you pick an item in the store to buy, its price tag shows its cost. But there is also a hidden cost to every decision we make.

For example, your choice to buy a $100 jacket means you may not have money left for sneakers. Going to see a movie tonight might mean a lower grade on your exam tomorrow. By buying the jacket or the movie ticket, you are giving up the sneakers or a better grade on your test. Economists call the value of the alternative we give up the “opportunity cost.”

Opportunity cost exists because of “scarcity.” Your resources (such as your money and time) are limited. Therefore, every time you say “Yes” to one thing, you are also automatically saying “No” to other things you could have done with that same money.

To master your finances, you must consider your opportunity cost. Ask yourself what you are giving up when you make a decision. If what you are giving up is more valuable to your future than the thing you are buying right now, reconsider making that purchase.