What is an Opportunity Cost?
Why is it important?
(short 🧵)
Why is it important?
(short 🧵)
We all try to optimize our lives because we have limited (1) Time and (2) Money
One of the ways to evaluate tradeoffs between Time and Money is by considering: Opportunity Costs
One of the ways to evaluate tradeoffs between Time and Money is by considering: Opportunity Costs
1/ What is an Opportunity Cost?
It is the potential benefit a person or company misses by making one decision over another
Opportunity costs can be grouped into three buckets
It is the potential benefit a person or company misses by making one decision over another
Opportunity costs can be grouped into three buckets
2/ Bucket #1: Time
‘Time’ based Opportunity Costs involve decisions you make about how you spend your time
‘Time’ based Opportunity Costs involve decisions you make about how you spend your time
Example:
If you decide to spend your evening watching TV, the Time based opportunity cost is what you could have achieved if you didn’t spend the time watching TV and did something else
You could use that time to work on a business
If you decide to spend your evening watching TV, the Time based opportunity cost is what you could have achieved if you didn’t spend the time watching TV and did something else
You could use that time to work on a business
3/ Bucket #2: Money
‘Money’ based opportunity costs involve decisions you make about how you spend your money
‘Money’ based opportunity costs involve decisions you make about how you spend your money
Example:
If you decide to invest in Apple’s stock instead of Microsoft’s stock, the opportunity cost is any price appreciation you miss in Microsoft’s stock that Apple doesn’t have
If you decide to invest in Apple’s stock instead of Microsoft’s stock, the opportunity cost is any price appreciation you miss in Microsoft’s stock that Apple doesn’t have
4/ Bucket #3: Time & Money
Time & Money Opportunity Costs involve decisions you make about how you spend your Time and Money
Time & Money Opportunity Costs involve decisions you make about how you spend your Time and Money
Example:
If you decide to pursue an MBA, there are many opportunity costs to consider:
(1) Work experience you don’t get while you’re in school
(2) Salary you don’t get while you’re in school
(3) Money spent to pay for the MBA
If you decide to pursue an MBA, there are many opportunity costs to consider:
(1) Work experience you don’t get while you’re in school
(2) Salary you don’t get while you’re in school
(3) Money spent to pay for the MBA
5/ You evaluate opportunity costs daily
You probably make decisions daily that have opportunity costs
Some of these decisions include:
You probably make decisions daily that have opportunity costs
Some of these decisions include:
1. How you spend your time:
• Work Time vs. Family Time
• Pursuing a Career vs. Building a business
2. How you spend your money:
• Buying a business vs. Building a business
• Buying Something vs. Leasing Something
• Work Time vs. Family Time
• Pursuing a Career vs. Building a business
2. How you spend your money:
• Buying a business vs. Building a business
• Buying Something vs. Leasing Something
You can’t eliminate opportunity costs out of decision-making, but you can be aware of them
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