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Opportunity cost is a term from economics used to describe decision making. Wikipedia defines it as: ‘the value of the next best alternative lost as the result of making a decision’. For example, if you have $100, you can only spend those dollars once. You can buy $100 worth of books or $100 worth of beer, but you can’t buy them both. $100 of beer can buy you a great night of fun, but you lose what you might have learned from the books. Opportunity cost is what you could have done with the money, but didn’t.

We face these decisions all the time. Deciding what to do with your weekend is an opportunity cost decision with time, rather than money. You’ll only get this weekend once, and after you’ve used it, you can’t get it back. Will you spend your time taking care of the house, or will you kick back and relax? Each decision forces you to sacrifice the other.

When considering spending now vs investing, future opportunity cost are quite large. If you forgo spending that $100 on books or beer and instead put it in the stock market, at the moment the opportunity cost is zero — the money is still there for you to spend. But if you earn 10% interest, twenty years later you’ll have $675. So, the opportunity cost of spending $100 today, is $575 in twenty years.

When you make decisions with your money, it’s good to consider the opportunity cost. Is this really the best way you can spend your money, or is there a better option?

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Header photograph by MikeLove