Bible Money Matters

Christian personal finance

Menu
    • About
    • Archives
    • Contact
    • Close
  • Making Money
      • Popular Articles

        • 50 Ways To Make Money: Maximizing, Creating And Increasing Your Income
        • 10 Weird And Unconventional Ways To Make Money
        • Making Money With A Blog (e-Book)
        • 10 Places To Sell Or Trade Your Unused (Or Broken) Electronics
        • Ways To Make Extra Money Series: 20 More Income Generating Ideas From Our Readers
        • Making Side Income Can Help Blunt The Impact Of Becoming A One Income Family
        • Earn Cash Back With Discover it® Credit Card
      • Recent Articles – Making Money

        • Best Sites Like Fiverr To Make Money As A Freelancer
        • 13 Of The Best Independent Contractor Jobs
        • 25 Of The Best Gig Economy Jobs
        • How To Make Money Blogging: Turn A Blog Into A Business
      • Categories

        • Making Money
        • Investing
        • Retirement
        • Jobs & Work LIfe
        • Money
        • Income
    • Close
  • Saving Money
      • Popular Articles

        • 50 Easy Ways To Save Money Every Month
        • 10 Weird And Unconventional Ways To Save Money
        • 10 Practical Ways To Save Money And Increase Your Net Worth
        • How To Save Money On Just About All Of Your Regular Monthly Bills
        • Ways To Watch TV Without Paying An Arm And A Leg For Cable TV
        • Save Money On Your Hospital Bill - Just By Asking
      • Recent Articles – Saving Money

        • How To Save $100k In 7 Practical Steps
        • Stairs App Review: Save And Invest To Earn 4-6% Interest
        • Honey Review: Save Money Automatically When You Shop Online
        • 9 Convincing Reasons Why You Need An Emergency Fund
      • Categories

        • Saving Money
        • Frugality
        • Planning
        • Finance
        • Saving For Retirement
        • Savings Accounts
    • Close
  • Banking
      • Best Rates For 2019

        • Best Credit Cards
        • Best Savings Accounts
        • Best Mortgage Rates
        • Best CD Rates
        • Best Brokerages
        • Free Credit Scores
      • Recent Reviews

        • TradeStation Review: Commission Free Stock And ETF Trades
        • Firstrade Review: Commission Free Trades on Stocks, Crypto, And Options
        • Cadre Real Estate Investing Review: Commercial Real Estate Investing
        • Axos Self Directed Trading Review: Invest, Trade Stocks For Free
      • Categories

        • Bank & Software Reviews
        • Investing
        • Credit
        • Banking
        • Mortgage
        • Insurance
        • Family Budget
    • Close
  • Recommended
  • Video
    • Close

When Making Big Decisions, Consider The Opportunity Cost

By Peter Anderson 2 Comments - The content of this website often contains affiliate links and I may be compensated if you buy through those links (at no cost to you!). Learn more about how we make money. Last edited March 30, 2015.

Share22
Pin23
Tweet27
Share6
78 Shares

In our culture we have a consumer focused mentality, a mindset that says it’s a good idea to buy the things we want, when we want them, regardless of the cost.  After all, you only live once, and you may as well live it up while you still can enjoy it, right?

What gets lost in this type of decision making is an eye towards thinking about our decisions critically, and weighing all of the pros and cons of a decision. Why am I  making this decision? Can I afford it?  What other things am I deciding to forgo in order to make this decision?  In other words, what is the opportunity cost of making the decision that we’re making?

View This Video On YouTube

Quick Navigation

  • What Is Opportunity Cost?
  • What Costs Should We Consider?
  • What You Spend Your Money On Now Can Hurt You Later
  • Opportunity Cost, And How It Could Be Killing Your Future
  • How Can You Determine If Something Is Worth The Cost?
  • Is It About More Than Just Money?

What Is Opportunity Cost?

When thinking about financial decisions that we’re faced with in life, it’s important to weigh the opportunity cost of our decision. In other words, what is “the loss of potential gain from other alternatives when one alternative is chosen?“.  What’s the trade-off I’m making? What benefits from the next best alternative am I deciding to not to partake of because of my decision?
opportunity-cost
When thinking about the opportunity cost, Paula Pant of Afford Anything likes to think of her decisions in the following terms:

whenever I make a decision, I like to imagine that a Magical Genie is offering me “a gift with a catch.”

She’s saying that often we’re faced with important decisions – but that every decision we make has a catch (the opportunity cost). There is a trade off that we’re making when we make that choice.

So for example, let’s say you’re making a decision about whether to buy a house that is slightly outside of your budget.  The “gift” in her scenario is this beautiful new house with a beautiful yard that will allow you to relax and enjoy your surroundings on a daily basis.

But what’s the catch?  The catch is that you’ll have to work extra hours at work, you’ll have to forgo eating out as often, and you’ll have to find a way to absorb the higher costs of upkeep and property taxes for the more expensive house.  You also won’t be able to save and invest as much because of all the money invested in the house.

So along with the gift, there is always a catch (or a series of catches).

The basic formula for opportunity cost is: what you are sacrificing / what you are gaining = the opportunity cost

The idea behind calculating the opportunity cost of our decisions is to consider the true costs of our decisions, and not just the immediate benefit that we’re realizing.

What Costs Should We Consider?

For which of you, wanting to build a tower, doesn’t first sit down and calculate the cost to see if he has enough to complete it? Luke 14:28

So what things should we consider when calculating the opportunity cost for a given decision? Here is what you might consider:

  • Out of pocket costs:  In our house buying example you might consider the out of pocket costs associated with buying the house, paying for property taxes, maintenance costs and so forth.
  • lost opportunity costs: You might also consider the lost opportunity costs, the things you won’t be able to do because you decided to buy the house. That might mean you’ll have less money to save and invest, you won’t be able to travel as much and in the long term you won’t have nearly as much saved for retirement. You may even have to work more in order to be able to afford the new house. In other words, the money and time you’ve spent now won’t be available for doing other things you might have done.

It’s important to consider not only our out of pocket and up-front costs when making decisions, but also the lost opportunity costs in all it’s forms.  Sometimes those costs aren’t readily apparent, there are tangible out of pocket costs, and then the intangible costs.

I heard one example of opportunity cost where a gentleman attended the Super Bowl. He bought his ticket for $500, and was elated to go to the game.  He then found out that his seatmate had paid almost $5000 for his ticket via a scalper.  So while his out of pocket cost for attending the Super Bowl was $500, his true opportunity cost was closer to $4500 – the net amount he could have received if he had sold his ticket.

What You Spend Your Money On Now Can Hurt You Later

The way you spend your money matters. There are consequences to all of your spending decisions, so it pays to pay attention, and be careful about how you spend your  money.

If you’re spending money on things like an expensive house outside of your means, a high cost education or on fancy cars and other status items, you’ll likely be less able to invest. You’ll have an opportunity cost of lost returns, and in the end you’ll have a smaller retirement nest egg.

Pay Attention On The Big Decisions

When should you be paying the most attention? In my opinion when you’re making the biggest decisions, things like:

  • What college to attend
  • Buying a house
  • Purchasing a vehicle

Making the wrong choice when it comes to these big dollar decisions can effectively be something that kills or hinders your financial future, or it can be something that helps to ensure it. Weigh the decision carefully, and make sure you know what the costs and the trade-offs are of your decision.

Opportunity Cost, And How It Could Be Killing Your Future

There are a lot of ways in which not considering the opportunity costs could be killing your financial future.

  • Not considering the opportunity cost of having less risk in your investments could kill your long term returns. If you try to avoid short term volatility in  your investments, you may be able to in the short term, but in the long term it may mean less of a return, and thousands less saved for retirement.
  • Not considering the opportunity cost of living in a bigger house could mean you overestimate your ability to afford the house, and could have the cost of not leaving enough left over to save, invest and give.  It could also mean less time for family since you have to work more.
  • Not considering the opportunity cost of getting an advanced degree could be bad – in more ways than one.  Many don’t consider the opportunity cost of tuition and lost wages due to not working while attending school. On the other side many don’t consider the opportunity cost of losing increased future earnings that an advanced degree could help you to earn (although that may be dependent on the degree field).

These are only a couple of examples that I came up with, but the point is that when you have big financial decisions, you need to consider the opportunity cost, otherwise you could end up making an extremely detrimental decision.

How Can You Determine If Something Is Worth The Cost?

Think about the two best alternatives, and then do the following:

  • Compare based on a similar measurement:  Compare the two alternatives using the same measurement, like money, time or relational costs.
  • Compare based on similar time periods: Look at the costs of the alternatives based on similar time periods, the costs for a 10 year period for example.
  • Evaluate the alternatives: Evaluate the first opportunity by what would be gained if you chose to do the second opportunity, and then evaluate the second in light of the first opportunity.
  • Add up the costs: Determine what the costs of the first opportunity are that would not be incurred if you chose the second opportunity. Then do the same for the second opportunity.
  • Make an informed choice: Make a decision based on which opportunity cost seems higher.

When making your decision remember that your decisions aren’t always only financial in scope, and tangible and intangibles may be taken into account.

Is It About More Than Just Money?

Making a decision after you’ve counted the cost is often about more than just money. It may be about relationships, health, convenience or other things.

Money isn’t the most important thing in life, and  while it can be an important part of the decisions we make, it can’t always be the only thing.

When it comes down to it, realizing the opportunity costs of any given decision, and then being deliberate about making your decision, is important.

Be sure you recognize what the “catch” is when you’re deliberating over a decision, and be honest with yourself in what trade-offs you’re willing to make.  Once you do you’ll be well on the way towards making the wise choice.

Do you usually sit down and calculate the opportunity cost of the decisions you’re making? Does it typically influence your final decision?

Related Posts

  • Devotional: Making Plans

    "For I know the plans I have for you," declares the Lord, "plans to prosper you and not to harm you, plans to give you…

  • Costs To Sell A House
    10 Things To Consider When Buying Or Building A New Home

    There are a lot of important things you need to think about before you buy or build a home. Here are some of the ones…

  • What Does It Cost To Sell A House? How Much Can You Expect To Pay In Fees, Commissions And Taxes?

    When you add it all up, selling a home can cost thousands of dollars in commissions, fees, taxes and other costs. Here's what costs to…

Share22
Pin23
Tweet27
Share6
78 Shares
Last Edited: 30th March 2015 The content of biblemoneymatters.com is for general information purposes only and does not constitute professional advice. Visitors to biblemoneymatters.com should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.

This article is about: Get Out of Debt, Planning

About Peter Anderson

Peter Anderson is a Christian, husband to his beautiful wife Maria, and father to his 2 children. He loves reading and writing about personal finance, and also enjoys a good board game every now and again. You can find out more about him on the about page. Don't forget to say hi on Pinterest, Twitter or Facebook!

Comments

    Share Your Thoughts: Cancel reply

  1. Alex V @ Eventus Financial says

    What a great article Peter. This should open up peoples minds in terms of how they decide to spend their money. Many do not think about the opportunity costs that come with making decisions to purchase specific goods.

    Reply
  2. Kirsten says

    I’m going to be sharing on my blog about the below, but I’ll go ahead and preview it here because it relates so well to your post. My husband recently purchased a hobby car, with my full support. It was a good deal, it was his dream car, and it was just going to sit in his grandmother’s garage until we were done paying off our debt. Then he bought one thing for it. Then another. And then there’s the insurance. It added up quickly and is going to end up costing us a lot of opportunities this year. He might be lucky if I don’t have him sell the car so we can recoup the expenses. He got way to excited about the here and now and totally failed to see the opportunity cost of any of his purchases.

    Reply
Previous Post: The Great Big Cord Cutting Manual For Cost Conscious Consumers
Next Post: The Legacy Journey By Dave Ramsey: Building Wealth And Leaving A Legacy
Discover Investment Platforms

Popular Posts

  • 21 Easy Ways To Earn Free Amazon Gift Cards
  • 10 Best Free Tax Filing Services And Software Online
  • 21 Apps That Pay You Real Money Fast
  • 17 TV Apps And Live TV Streaming Services To Watch TV Free
  • 30 Legit Online Jobs That Pay Well
  • 37 Easy Ways To Get Free Gift Cards
  • How To Get Free Stock
  • 40 Easy Ways To Get Free Money Fast
  • 21 Places To Read Free Books Online
  • 24 Legit Online Jobs
  • 17 Best Work From Home Jobs: A List Of Legit Online Jobs That Pay Well

Recent Posts

  • How To Save $100k In 7 Practical Steps
  • How to Save Money When Remodeling A Home
  • How To Hire A Contractor For Your Remodeling Project
  • Remembering 9/11 Years Later: Where Were You On That Fateful Day?
  • TradeStation Review: Commission Free Stock And ETF Trades
  • Firstrade Review: Commission Free Trades on Stocks, Crypto, And Options
  • Cadre Real Estate Investing Review: Commercial Real Estate Investing
  • Best Sites Like Fiverr To Make Money As A Freelancer
  • Axos Self Directed Trading Review: Invest, Trade Stocks For Free
  • 30 Quotes About Easter And Resurrection: He Is Risen!

Disclaimer

The information contained in BibleMoneyMatters.com is for general information or entertainment purposes only and does not constitute professional financial advice. Please contact an independent financial professional for advice regarding your specific situation.

In accordance with FTC guidelines, we state that we have a financial relationship with some of the companies mentioned in this website. This may include receiving access to free products and services for product and service reviews and giveaways.

Any references to third party products, rates, or websites are subject to change without notice. We do our best to maintain current information, but due to the rapidly changing environment, some information may have changed since it was published. Please do the appropriate research before participating in any third party offers.

Amazon and the Amazon logo are trademarks of Amazon.com, Inc. or its affiliates.

We respect your privacy: Privacy Policy.

Thanks for visiting!

Bible Money Matters - Seen On These Sites and more..
Bible Money Matters is a personal finance, entrepreneurship and investing community. Give more, save more and live more.

Copyright © 2023 · Bible Money Matters | Sitemap | Advertise | Privacy Policy