Fancy Kelsey & Finance: Opportunity Cost
Welcome back to Fancy Kelsey & Finance! Today we’re learning about “opportunity cost”, which is a fancy way of saying what else you could have done or had, if you’d make a different choice.
For example, in my last post I defined financial illiteracy as “not knowing what you need to know about money, which can lose you hundreds of thousands of dollar or more.” In that definition, I gave you the vague dollar cost to the choice of remaining financially illiterate.
While the dollars you give up through financial literacy is indeed an opportunity cost, I could also have provided the following real opportunity costs:
Retiring at age 60 or 65 (or earlier) and being able to enjoy your dreams and hobbies while in relatively good health
Traveling to dream destinations with loved ones
Being able to fund the cause or organization that means so much to you
Having the home and life you want to provide your family
In a recent financial education talk I gave, I mentioned my dream of purchasing a really cool bunkbed set for my kids. Maybe dream is too strong a word. More like short-lived emotional interest. We’re expecting twins in our family, so we’re consolidating bedrooms and moving my current children into a shared room, hence the need for bunkbeds. But oh my have my eyes been opened to the wonderful world of modern bunkbeds! There are bunkbeds that look like cabins…or ships…or any number of different forts! There are bunkbeds with slides…or rock-climbing walls…or hobbit holes! And of course, if I don’t buy one of these amazing, fantastical contraptions, my children will most certainly live a deprived childhood and never amount to anything as adults. At least I think that’s what the marketers hope I conclude. And all for the low, low price of $749 or $995!
So I sat down and had a chat with myself about opportunity costs. I looked at my choices. I could have that $749 dream bunkbed, or I could buy the same one used for $300 on Facebook market, or I could buy a not-fancy used one for $100 on Facebook market. If I had $749 to spend on a bunkbed, but only spent $100, that would give me $649 to spend on something else and that something else would be my opportunity cost of buying a brand-new fancy bunkbed. What could I do with that extra $649?
I could spend $500 on new tires for my car so I don’t slip and die on frozen Minnesota streets this winter. That sounds smart. Still leaves me $149 that I could use for a bunch of used baby gear to help me survive the first three months of newborn twins.
I could send both my children to summer camp for a week/half-week for close to $649.
I could contribute towards the savings for my husband’s Lasik eye surgery so he would have a chance to take out any bad guys that intrude into our home at night with the Katana I bought him in Thailand years ago, instead of just dice our hallway mirror. (I actually would really like to see this, either way it goes.)
So many options. So many opportunity costs. Needless-to-say, I went with the $100 used bunkbed, which has since been turned into a treehouse-over-goldmine by nothing other than my kids’ imaginations and a few blankets. It seems I also forgot the opportunity cost of allowing my children to exercise creativity, which will likely contribute more to their adult wellness than a pre-made fancy bunkbed would have.
I hope you get the picture. Every ‘yes’ to one choice is a ‘no’ to another and vice versa. Being aware of these choices can have enormous impact.
Reach out to schedule a comprehensive evaluation of your finances to find the hidden choices that are shaping yours and your family’s futures for better or for worse.
