Microeconomics was nearly the Waterloo of my college career, but I learned one idea that has benefited me. That idea is opportunity cost.
What is opportunity cost? Basically, it is the difference in return between the option you choose and the one that you pass up. Another way of saying it would be that the opportunity cost of choosing Option A is the benefit you do not get by choosing Option B.
For example, say that you must choose to either go to college full-time or work during the next four years. One opportunity cost of college is the money that you could earn, save, and invest during the time when you are studying and have no income. Viewed that way, the college option might seem to be a loss.
Yet, with a college degree, you could make more money in the long run despite delaying your income producing by four years. In that case, the opportunity cost would probably be worth paying.
Or suppose you had to choose between investing in two stocks. You choose one that eventually earns a 3% return over the first year, but pass up a second, only to see it earn 6% during that same time period. The opportunity cost you paid was the additional 3% earnings. Thus, you have more money than you had, but are you glad about the opportunity cost you paid?
This became relevant to me when I recently learned that my car would need to be replaced this summer. I was faced with the typical choices. New or used? Hatchback or sedan? Blue, red, white or silver? What brand? Which make? Which trim?
On top of that, cars nowadays have an impressive array of options to enhance your driving experience. There are moonroofs (with or without wind deflectors), cameras that display the scene behind you when you back up, lighted door sill plates, GPS systems, turbo engines, spoilers, Bluetooth devices, and all sorts of alternatives for listening to music!
The temptation is to load up a new car with snazzy gizmos to the limit of what I can fit into my budget, but the higher payment means more debt, and less freedom because of the obligation to make that monthly payment. Sure, I can do it, but the opportunity cost is to have less money to travel, which is, to me, the more important consideration.
So, while I would love for you to see me cruising down the highway in some expensive red thing with leather upholstery and all the whiz-bang features named above, you’ll instead see me in something smaller and more moderate, heading out on a two-week road trip.
How many people do you know that make their decisions without fully considering the opportunity costs? How many live with regrets for the things that they can’t do because of other obligations they took on?
It’s not just about money and careers, either. Some people jump into relationships that offer one thing, such as stability, without fully considering how much they will want of another, such as emotional closeness. Later they find out how important closeness is. Or they choose to take a second job at the expense of an artistic or athletic pursuit that would have enhanced their life considerably.
Consider that sometimes the problem isn’t a lack of choices, but an abundance of them – with the necessity of choosing which ones will be most meaningful in your life.