Monday, February 27

The True Cost of Everything

Have you ever regretted making one decision over the other? Such as hanging with friends instead of studying? Or purchasing a lavish gift instead of paying off your credit card balance?

What you are feeling is not only remorse, but the effect of opportunity costs. Opportunity cost is what you give up to do something. It's the cost of your decision. It is often referred to when discussing business and economics, but it also applies directly to you and in this article we will focus on its impact on the economy of YOU.

While it's commonly associated with loss, opportunity costs don't always have to be a bad thing. For example rather than go to law school, you decide to follow your passion for helping others and pursue a career in social work. While you give up the opportunity to potentially make significantly more money, you're employed in a field that you love and find fulfillment in helping others.

Or think about high school back when you first became of working age. Say you dreamed of making the varsity soccer team, but you also wanted to earn money working a summer job. If you choose to work instead of practice for tryouts, that's your opportunity cost, you gave up preparing for tryouts and possibly your spot on the varsity team for the opportunity to earn money.

Intertwined and Ongoing

But the opportunity costs don't end there. They are often intertwined and ongoing. Think about what you spent your money on from the summer job. If you choose to spend your summer earnings on an expensive pair of sneakers instead of saving and investing the money you gained a pair of shoes but you lost the opportunity to take advantage of compound interest allowing your money to grow and make more money for you.

Every decision has an opportunity cost whether emotional, financial, or experiential. And while for most of us money is essential to securing a comfortable future, in reality, the most valuable resource we have is time. We can earn more money but we can't get our time back. Since time is so valuable, one of the best ways to calculate the opportunity cost is to determine how much time or life it cost you.

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Every decision has an opportunity cost whether emotional, financial, or experiential.

So let's take the pair of sneakers you decided to purchase with your summer job earnings. Your job pays $10/ hour and let's say that after taxes you take home approximately $8.00/ hour. The pair of sneakers costs $180. At that price it will take you approximately twenty-three hours of work to buy that pair of sneakers. That's nearly an entire day! That's a really expensive pair of shoes!

When you think of what else you could do with an entire day you can truly grasp the opportunity cost of that pair of shoes or any other item you're considering splurging on. As you begin to take on larger financial obligations such as vehicles and homes begin to think about the opportunity cost involved. The used car could be significantly cheaper than a new car, but could require higher maintenance costs and repair time. A fixer upper home may be less expensive but just as expensive or more expensive than a new home once necessary repairs are made.

The old adage nothing in life is free is pretty accurate. Even a lottery ticket costs money. Always remember that the cost of anything is the amount of life you exchange for it.

Spend wisely,
Tonya

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