Opportunity Cost:
The Hidden Consequences of Every Decision
One of the most important concepts for people to understand is opportunity cost. Opportunity cost is what you give up when you make a choice; investing in this thing means not investing in that, and spending time with one person means not spending time with another.
For the financial markets, this is how that plays out. Let's say you invest $1,000 into stock AA for a year and that stock produces a flat return of 50%. At the end of the year, you now have $1,500. Sounds pretty fantastic right?
Now let's pretend that at the same time your stock was producing a return of 50%, another stock BB was delivering a return of 200%. You only had $1,000 to invest, and you had to decide. The opportunity cost of investing in stock AA was giving up the return you could have made by investing in stock BB.
The value of opportunity cost is much more apparent when we talk time.
Every day most people make decisions about how to use their time. How long we sleep, how much time we take to eat, and how long we watch TV or surf online. When you spend time doing something, you're also choosing NOT to do something else.
For example, let's say I choose to drive to a fast food place every afternoon for lunch. I've decided to spend time in my car going there, paying for an unhealthy meal, eating in the car and driving back to my job.
Every time I do that, I give up the opportunity to eat a healthy meal I brought with me from home. I give up the opportunity to save money on the food by making it myself. I give up the opportunity to take a walk, read a book or catch up with a friend instead of commuting to and from the fast food place in the car.
The actual cost of any action you take is the opportunity cost - the value of the time or the return on the investment you DIDN'T make. Once you settle on a course of action, you lose the opportunity to benefit from a different course of action.
Let's say you're spending an hour every day walking for your cardio exercise, but you want to change it up. You might consider going to different locations, changing the time of day or altering your gait. Those are all good things to consider, but better options may exist.
Instead, compare walking for an hour against 30 minutes of interval training. The intervals burn more fat and build more muscle in about half the time, leaving you with 30 extra minutes to do something else. Walking is good, but you lose the potential for more progress doing intervals.
That doesn't mean what you're doing is wrong. Maybe, walking is how you get from work to home. So if you walk instead of drive, the opportunity you're missing is sitting in a car and not getting any exercise at all while you commute. That makes walking the better choice.
It's not about changing things within the boundaries you understand; it's about considering completely different options.
Working out in a gym can be a great way to spend some of your time. But if you don't know what you're doing or you're doing things that can cause you harm, you may be squandering that opportunity.
You might see a better return on that time investment if you take a class, hire a trainer or workout with a more knowledgeable friend.
Chatting with co-workers instead of making a sales call means missing out on potential revenue, and watching TV instead of working out means missing out on improved health and fitness. The opportunity cost of making one choice over the other isn't always obvious, but it exists in everything we do.
Take a look at your schedule. Are there opportunities for you to get a better return on your time? Will making one choice over another, help you reach your long-term goals?
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CAUTION: Check with your doctor before
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1/24/2023
