Do you ever get a sinking feeling after purchasing that expensive jacket you had your eye on, or regret skipping out on a study session in favor of socializing instead? Those feelings could be connected to opportunity cost– a term in finance that means every choice you make has a hidden price tag.

What is Opportunity Cost?

Opportunity cost is the value of any potential alternative you have to give up to go after a specific choice. In other words, when you make a decision, you give up possible advantages that would come with the other options available to you - it’s the hidden cost associated with every choice made.

Every Decision Has a Cost:

Imagine you have $50 and are debating whether to spend it on a new video game or save it for a concert ticket next month. If you choose to buy the video game, your decision has an opportunity cost, which would have been the fun you would have experienced at that concert with friends; on the other hand, if you choose to save for the tickets, that opportunity cost would be the joy you’ll miss out on from playing the new game. Every decision comes with its own trade-offs.

Long-Term Implications:

Understanding opportunity costs is about more than making immediate choices - it involves considering future effects as well. As a young adult, you’re going to face decisions about education, career paths, and personal finances. For example, you could spend your summer working part-time in a local shop instead of taking an unpaid internship in your chosen field. Sure, you’d earn some money, but the opportunity cost might be the experience and skills gained from the internship, which could boost your future career prospects.

Tips for Making Informed Decisions:

• Before making any decision, always research all available options and understand the cost implications. Knowing what you are giving up is the first step in understanding opportunity cost.

• Carefully consider all potential outcomes of each choice you're considering. What benefits will you gain, and what will you sacrifice?

• Understand your short-term and long-term goals. Prioritize them and align your decisions with what matters most to you.

• Time is a valuable resource. Some opportunities may be time-sensitive, and by postponing decisions for too long, you can risk forgoing those opportunities altogether. For example, you might not be thinking much about your retirement now, but imagine looking back when you’re in your 50s wishing you would have invested $50 a month in a mutual fund rather than spending it on daily lattes at the coffee shop. Investing that $50 a month over 37 years at 10% interest would be $199,723.89!

• Accept that not every decision you make will be perfect, and use those choices as opportunities for growth in future decision-making processes.

In the world of finance, opportunity cost is a guiding principle that can help you navigate many decisions. Remember, opportunity cost isn't about guilt or depriving yourself of immediate joys! By understanding the trade-offs associated with each choice, you can make informed decisions that align with your goals and aspirations. Life is all about balance!

Bonus tip: Develop opportunity cost awareness! Create a list of potential decisions you face each day (studying vs. gaming, saving vs. spending) and write down their opportunity costs; this way, you'll begin to see how understanding these hidden costs can help you make smarter choices!