Ask Away Blog: Opportunity Cost or IS IT WORTH IT?!

Opportunity Cost or IS IT WORTH IT?!

Monday, December 16, 2019

 

What is Opportunity Cost?

Have you ever come home from a really long and chaotic day at work and you feel lazy and unmotivated? You then realize you will of course have to eat dinner at some point this evening but you have no motivation to cook. So you decide you’ll order delivery and your eyes are bigger than your stomach so you order too much PLUS you ordered some of the worst food possible for your body, completely throwing off your 10 day long record of staying on your health eating plan. You also were out of money in your cash envelope for dining out, but it’s okay because you took money from your car maintenance fund, even though your car is getting inspected before your next pay day so now you’ll have to make up for the money you took from THAT category. So was it worth it? Either way, this is a great example of opportunity cost.

Opportunity cost is when you make a decision to choose one option over another and then dealing with the consequences whether they are financial, health, or lifestyle.

So in this example, while ordering food may have satisfied your laziness in not cooking for yourself, even though you had food at home in the fridge, it may have taken another toll in other aspects of your life.

Diet: You strayed from your healthy eating ways and now you have a stomach ache.

Finance: You’re now short money in your car fund and you must take from another fund so that you can pay for your car’s inspection that comes up before next pay day.

Emotional: Now you’re stressed about money and guilty about messing up your diet.

Now, if you had stayed home and just mustered it up and cooked yourself a healthy dinner with the ingredients you already have, the only sacrifice you may have made is you didn’t let yourself be lazy for 20 minutes and instead you cooked. So in the long run the better investment would have been to just suck it up and save money, stress, and your health in the long run.

This whole opportunity cost thing can be applied to all kinds of things like whether or not you hire a cleaning person, if you will shop for groceries or have them delivered, or taking the bus to work or purchasing a parking garage pass. And opportunity cost doesn’t just mean money, it means time and energy and happiness. Life is precious and time is limited so if it’s not worth your time or energy than it may not be a worthy investment.

The three main costs when it comes to opportunity are:

Time: How much time is lost or gained from this choice?

Money: How much money is spent or saved from this choice?

Effort: How much effort does this choice take or save?

As the example in the beginning of this post showed, there can be more specific costs as well like diet progress, the overall health and well-being of yourself or a pet, the stress you have to deal with from something, and if the end value is even worth any of it.

So how do you calculate opportunity cost?

Basically opportunity cost = sacrifices vs. gains
Here’s another example:

You pay $100 a month for a parking pass for a garage near your work. You want to see if you can start riding the bus in order to save money. The bus is $50 a month.

So what are the sacrifices?

Time: You will be stuck to a bus schedule. You can’t suddenly leave work early.

Money: If you have to leave work early one day for an appointment (and you usually have an appointment 2 times a month), you may need to drive your car and park in the garage at a daily rate of $10. That equals $20 total plus $50. So that’s a total of $70 a month.

Energy: You will have to find a bus stop closest to you and find a way to either walk there or park your car somewhere safe even though you have a brand new shiny car and you like to keep it out of the sun to protect the paint job, and you don’t live in a part of town that has safe parking near bus stops.

So in the end you may save $30 a month in cash, but you also lose freedom and you may have some other things that you lose.

So maybe for you, it’s not worth it.

You can use the opportunity cost equation for anything in life even if finances aren’t involved. Some of us do it already in our heads as we talk ourselves through deciding whether to volunteer one night a week for something or just stay at home and take advantage of the free time to catch up on house chores. Or maybe you are deciding if it’s worthwhile to travel to your in-laws for the holidays or if you should have them come to your home.

Either way, ALWAYS consider opportunity cost when you’re faced with a decision.

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