The Opportunity Cost of Spending How You Can Improve Your Credit Score Here ph
Everyone knows how to calculate the cost of buying something. First, you want an item. Then you shop around, find the best price, buy it, and add sales tax if necessary. Then it is yours, with the numbers on a receipt to prove it. However, whenever money is spent on something the total cost of this expenditure involves much more than just what‘s on the receipt; it’s called the “opportunity cost“. According to the Economist, the definition of "opportunity cost" is "the true cost of what you have to give up to get it". In other words, if you decide to buy a dress or suit for $250, obviously you will have to shell out the $250 (or charge it on your credit card), but in addition you will be giving up the ability to use that $250 in another way, a way that may be more valuable or beneficial.
For example, you could have used that $250 to add to your retirement savings. What would the money have done for you if was channeled that way? Let’s assume you’re 30 years old and the rate of return on investments is approximately 5%. If this money was invested and compounded annually over 35 years, $250 would turn into $1,433 at age 65. So what would be a better choice for you? Do you really need the dress or suit? Do you have adequate retirement savings? Another option for the $250 would be to pay down debt. Perhaps you have a credit card balance or student loan. If you’re paying a high interest rate on those loan balances, not only would the $250 pay down some of the outstanding loan amount, it would also lower the amount of interest you would pay with the lower balance. Even small spending decisions involve an opportunity cost. Deciding whether to buy a $3 cup of coffee by itself may not require deep thought or analysis but if you buy that coffee every day of the week, the expense will add up to almost $100 a month or $1200 a year and that amount is definitely worth analyzing. Maybe $1200 could pay for an educational course that would give you additional certification allowing you to earn $10,000 more in annual salary?
Every spending decision you make should be viewed in terms of the whole cost -the purchase price plus opportunity cost. Evaluate your choices based on your financial needs, wants and goals and then use your money in a way that will benefit you the most.
Please share your thoughts by leaving a comment and I'll send you a free gift.
Tweet This Post
Do's and Dont's of the Credit Card Game Here pf Futhermore: The Opportunity Cost of Spending
2/2 Powered by TCPDF (www.tcpdf.org)