Money Management: Opportunity Costs

Table of Contents

Opportunity Costs – The Real Cost of Unnecessary Purchases

Opportunity costs are the complete costs of making decisions and using resources. When we apply this concept to money management, we can improve our ability to achieve our own goals.

Often when we make an unnecessary purchase, we tend to only think of the cost of that purchase in terms of dollars. However, understanding that there are additional costs to you, beyond the dollar cost – will help you to better manage your money and resources.

Some Examples:

If you are trying to build up an emergency fund to help yourself get out of debt and better manage your credit – and you spend $200 on an unnecessary impulse purchase:

  • you have lost the opportunity to put that $200 in your emergency savings account,
  • you have lost the opportunity to make interest on that $200, and
  • you have increased your risk of needing to use credit in case of an emergency.

If you are trying to save for college but decide to splurge $150 and take your friends out for dinner – your splurge means:

  • you have lost the opportunity to put that $150 towards your college savings account,
  • you have lost the opportunity to make interest on that $150,
  • you may end up having to takeout student loans for that $150,
  • you may end up delaying your ability to go to college, and
  • you may end up delaying your ability to increase your income with a college degree.

Applying Opportunity Cost Thinking

There is a very straight forward, 4-step method to make applying opportunity costs more manageable – which will help you avoid the agony of taking hours to make a simple purchase decision:

  1. Decide what is important to you by establishing your own goals for your money.
  2. Create a budget and plan to make your goals a success.
  3. Track your goals and be aware of your finances.
  4. Think before you make an unnecessary purchase.

Taking the time to identify those goals that are truly important to you and the steps you are willing to take in order to achieve them – will give you a much better perspective on the opportunity costs of unnecessary purchases.

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