I‘m sure you’ve heard the term “opportunity cost” before, and even have a pretty good idea of what it means, in a financial sense.
But… What if that’s not all there is to understanding “opportunity cost”? What if there’s an “opportunity cost” of a different sort—one that’s honestly missed by most people, but no less costly?
In the world of money and business, an “opportunity cost” refers to the loss of potential gains when we choose to pursue one opportunity over another. In the real estate investing world, for example, if I decide to do a rehab on a property, it may prevent me from taking advantage of other opportunities if it ties up all of my resources.
The cost of the opportunity is what I lose by having to pass on other opportunities—because my money is ‘tied up’ elsewhere, I might have missed an opportunity.
It’s not uncommon to hear people carefully measuring the opportunity cost of their money and finances.
In fact, many people are obsessed with this, insisting on only the absolute best return on their money—and refuse to do anything that might compromise that.
For example, some people refuse to purchase a new or even a newer car. Instead, they insist on driving something they can buy for $2,000-$5,000, because the $10,000 or more car would lower their returns. They make decisions like this exclusively based off of how to keep the maximum amount of money working for them at the absolute highest returns.
The truth is, whenever we think of “cost” or “opportunity cost” we almost always relate it to money, don’t we?
But consider with me for a moment:
Is “opportunity cost only about money?
Well, allow me to expand upon the idea of “opportunity cost” and also share the implications of not fully understanding it.
No, ‘opportunity cost’ does NOT relate to money only…
Unfortunately, many people only see the financial implications of always measuring the cost. However, in reality, opportunity cost is part of every single decision that we make.
For instance, choosing to not go on vacation because you want to invest $5,000 more in an investment account is a choice between two things, and there is an opportunity cost to both choices.
- Not investing your $5k costs you the potential returns (profits) you might gain on that investment of money.
- Not going on vacation costs you an opportunity to make returns also—in the incredible, shaping memories for you and others with you.
If you have young children, that’s one less year that you will get to experience something incredible with them. Sure, your investment account may be $5k healthier, but your children lost the opportunity to experience a great time with their parent(s) and will never get that time back.
That’s an opportunity cost most people don’t factor in.
- You may be wealthier when you’re older, but are your decisions also possibly teaching your children that financial investments are more important than shared experiences together?
- Are they likely to grow up doing the same thing to your grandchildren one day?
- How much opportunity would that end up costing you?
How about choosing not to buy that couch you or your spouse wants right now, because you would rather ‘invest’ that money elsewhere?
Is investing a bad thing? No, it’s not! Your spouse probably even thinks it is a good idea too—but she/he also might really like to have the new couch. If you’re only focused on the financial opportunity cost, then the conversation ends with you giving her/him the usual, ‘sorry, not now, but someday…’ type of response.
Imagine this: how would your spouse feel about YOU if you sacrificed a little from your investments to surprise her/him with the couch? What’s the ROI on that decision? Would it make her/him feel important to you? You bet it would!
Now imagine if you were to say “no” to the couch…not because the money’s not there, but because your investments are more important. (???)
Maybe you don’t even say that explicitly, but it’s pretty clear that your commitment is more to your investments over her/him by your decision making, isn’t it?
Think hard about that…
What does it cost you if you make the wrong decision?
How about making the decision to meet with someone for a lucrative business meeting at the same time as your daughters dance recital? What was the opportunity cost of that decision?
You may make tens of thousands of dollars as a result of the meeting, but at the opportunity cost of your daughter putting on a performance that her dad or mom didn’t see. How many of those dollars from that business deal does it take to make up for your child’s lasting memory of you not being present for that day?
What’s the cost if you choose your daughters dance recital and attempt to reschedule the business meeting?
There is an opportunity cost in just about every single decision we make. Are you measuring the cost? What is most valuable to you?
Would appreciate hearing anything you have to share about this with a comment below.