Using Opportunity Costs to Live a Happier Life
by Gary Foreman
An opportunity cost is often something you give up to get something else, often something better. See how you can use opportunity costs to create a secure financial future and a happier life.
Sometimes it’s helpful to take a concept out of its original environment and see how it fits someplace else. Today we’re going to examine an economic theory and see how it might apply to our personal lives.
What are opportunity costs?
The Economist website defines ‘opportunity cost’ as “The true cost of something is what you give up to get it. This includes not only the money spent in buying (or doing) the something, but also the economic benefits that you did without because you bought (or did) that particular something and thus can no long buy (or do) something else.”
A few examples of opportunity costs you may relate to
To put it simply, for everything you get, you give up something else. That’s an important concept. Let’s consider an easy example. If you spend $40 on a pair of jeans, you do not have that money available to buy a pizza or two. The “cost” of the jeans is not only $40. It is also giving up some pizza.
Let’s further suppose that you go out to lunch with co-workers every day. And a typical lunch costs you $10. Add a tip and sales tax and that lunch brings the total to $13.00. So you give up 46 minutes of your life every day to work just to pay for lunch.
How about a different situation? Remember that an opportunity cost is what you give up by making another choice. For instance, suppose that you choose to spend $100 on a credit card knowing that you’ll pay only the minimum when the bill comes due. In effect, you’ve given up about $140 in the future to make that purchase today. That’s because finance charges will be added to the cost of your purchase.
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Opportunity costs, your time and your money
We face opportunity costs with our time, too. I can choose to spend an hour watching TV. But that’s an hour that I won’t be talking to my wife, playing with the kids, doing home projects or sleeping. Of course, watching TV might be the best use of that hour. Still, it’s a good idea to think about it before you spend the hour.
Sometimes the difference between choices is surprising. Suppose you spend $1 at break time five days a week. No big deal. Right? But if you didn’t spend that dollar every day and saved it earning 3% interest, you’d have $3,000 in ten years. Or $7,100 in 20 years. Or $20,000 in 40 years. So by choosing that $1 snack each day, you’ve given up a new car when you retire. A good trade-off? Only you can decide. (See The Big Difference Compound Interest Can Make.)
There’s also the possibility of trading money today for time tomorrow. For instance, you could use the money from those work day snacks to allow you to retire 3 or 6 months earlier than you would otherwise. Is it unusual to think of “banking” a few minutes each day towards an early retirement? Perhaps, but it does give you a new perspective on spending.
Opportunity costs and credit cards
But, what about credit cards? Don’t they make it possible to buy the things that we want? Yes, you can use your plastic to do that.
But credit cards are deceptive. They lead you to believe that you can spend more than you make. And, for a short time, that’s probably true. But eventually you get to a situation where you can only afford the minimum payment each month. Once there, you’re back where choosing to spend on one thing prevents you from buying something else. And, you’ve also made the choice of paying interest to the credit card company on the monthly balance instead of having that money for other uses.
Use these guidelines to choose the best plan to pay off your credit card balances.
So how can you use opportunity costs to help you live a happier life?
By thinking of the alternatives before you spend your time and money. Even though something looks good, if you stop to compare, you might find something else that you’d prefer to spend your time or money on.
Reviewed June 2021
About the Author
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. You can read Gary's full bio here. Gary shares his philosophy of money here. Gary is available for audio, video or print interviews.
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