The saying, “There is no such thing as a free lunch”, is most certainly true.
Everything in life has a cost.
The problem is that most people only see “cost” in terms of currency and monetary value.
Some people may understand the cost of time, but very few people are privy to the cost of an opportunity.
In this post, I’m going to do my very best to explain this concept, but as a heads up, I found it a lot more difficult to explain than I originally thought I would.
Deep breath. Here goes…
What is the cost of an opportunity?
Opportunity cost is an economic term that’s used to describe the cost of what you must give up when you make a decision and/or commitment towards an opportunity.
For example, an actor has been given the opportunity of a leading role in a movie, but by accepting this role, the cost is that they are unable to accept other upcoming roles which may or may not be a better fit, and/or may offer a better remuneration package.
Another example; you take the opportunity to go to university and study Chemistry. The cost is that for those 2-4 years you won’t be able to study English Literature (or any other subject), you also won’t be able to go traveling on a gap year, and you won’t be able to get a head-start on your career and start a full-time job.
Basically, you can’t do two things at once. So, by choosing one you have to reject the other. This is the cost of your opportunity.
How to calculate the cost of opportunity
Calculating an opportunity cost is a very difficult thing to do because you are often working with unknown future variables.
If you take the opportunity to invest $1000 into the FTSE100 (UK stock market), then you are unable to invest that same money into the S&P500 (US stock market). It’s impossible for you to know which one is going to give you the best return on your money, and therefore impossible for you to calculate the cost of the opportunity before making your investment.
In the above scenario, you can, of course, calculate the cost after you have made the investment and some time has passed, but although hindsight is a wonderful thing, in this situation, it’s not very helpful when deciding whether you should take the opportunity or not.
Thankfully, some opportunity costs are a little easier to calculate.
For example, if you could only buy one home and you wanted to live in a penthouse apartment in a metropolitan city, then you would have to forgo having a large mature garden with a private driveway sweeping through it.
In this latest scenario, most of the cards are on the table and it’s easier for you to decide which of the opportunities best suit your need. However, always be aware that there may be future variables that increase your opportunity cost, e.g. splurging on your bachelor-pad-penthouse and then 9-months later an unplanned human arrival means that you may have been better off with a family house in the country.
The long and short of it is that the costs of your opportunities are not always known at the time when you need to say either yes or no. It’s only in hindsight that the true cost of your decisions comes to light.
Making yourself available for opportunities
Although I earn a decent income, my lifestyle is extremely modest. I often get asked why I don’t buy a house or upgrade my lifestyle and the reason is that I like to live as lean as possible so I have the time and finances available for when an opportunity does arise.
Have you ever seen an amazing deal, investment opportunity, or had a great business idea and thought to yourself, “Damn, I wish I had the funds available”?
Or have you ever thought, “Oh, I’d love to go there/do this, but I just haven’t got the time”?
Usually, this is because you have already written off all your free time and maxed out your monthly income committing to other opportunities. The cost that you are paying for this is that you have to watch future opportunities pass you by.
Yes, I could seriously upgrade my lifestyle. Would this make me happier? Probably, in the short term. But not in the long term. I would simply be collecting material possessions and doubling my monthly bills for no real reason at all. I am perfectly comfortable and happy with my current setup, so why spend money where it is not needed?
Instead, I want to be ready and prepared for any future opportunities that may come my way.
Why it’s good to know this
Once you understand this concept you will be more careful when making decisions and commitments. You will begin to consider the reality that by choosing one option, you will lose the possibility of one or more current or future opportunities.
It helps you to recognize both what you will gain along with what you will have to give up, which in turn helps you to make better-informed decisions and maximize your resources.
Why it’s bad to know this
As mentioned earlier, opportunity costs can be extremely difficult (if not impossible) to calculate due to the outcomes usually relating to future events and circumstances.
This can, therefore, make decision-making much more difficult. So difficult, in fact, that you can get stuck in a state of decision paralysis, whereby you make no decision at all or you take so long to make a decision that you miss the opportunity altogether.
Be aware of this and don’t let it happen.
Every decision and commitment that we make has a cost, not only in time and money but also in opportunities that we will have to forgo both now and in the future.
Sadly, we can’t have everything and opportunities are both lost and won by the decisions we make.
The best advice I can give you is to think long term. The world is constantly changing, and backing yourself into a corner with numerous time and money commitments from jumping at smaller opportunities, could mean that you miss out on the real life-changing opportunities that come your way.
Remember, there’s always a cost.
P.S. Unless, of course, you have a crystal ball. 🔮 In which case, you can disregard this post.
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- Embrace Your (Selective) Ignorance
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