New Article: Lost Opportunities

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      Lost Opportunities
      The Dollar Stretcher
      by Gary Foreman

      Sometimes it’s helpful to take a concept out of it’s original environment
      and see how it fits someplace else. Today we’re going to examine an
      economic theory and see how it might apply to our personal lives.

      The Economist website defines ‘opportunity cost’ as “The
      true cost of something is what you give up to get it. This includes not
      only the money spent in buying (or doing) the something, but also the
      economic benefits that you did without because you bought (or did) that
      particular something and thus can no long buy (or do) something else.”

      To put it simply, for everything you get, you give up something else.
      That’s an important concept. Let’s consider an easy example. If you spend
      $15 on a pair of jeans, you do not have that money available to buy a
      pizza. The ‘cost’ of the jeans is not only $15. It is also giving up a pizza.

      Another way to look at opportunity cost is the amount of time we give up
      working to buy a product. Suppose you make $12 per hour. Our tax rates are
      all different, but you can pretty much expect to pay about 1/3 in Social
      Security and federal, state and local income taxes. That leaves you with $8.

      Let’s further suppose that you go out to lunch with co-workers every day.
      And a typical lunch costs you $6. Add a tip and sales tax and that lunch
      brings the total to $7.20. So you give up 54 minutes of your life every day
      to work just to pay for lunch.

      How about a different situation. Remember that an opportunity cost is what
      you give up by making another choice. For instance, suppose that you choose
      to spend $100 on a credit card knowing that you’ll pay the minimum when the
      bill comes due. In effect you’ve given up about $140 in the future to make
      that purchase today. That’s because finance charges will be added to the
      cost of your purchase.

      We face opportunity costs with our time, too. I can choose to spend an hour
      watching TV. But that’s an hour that I won’t be talking to my wife, playing
      with the kids, doing home projects or sleeping. Of course, watching TV
      might be the best use of that hour. Still, it’s a good idea to think about
      it before you spend the hour.

      Sometimes the difference between choices is surprising. Suppose you spend
      $1 at break time five days a week. No big deal. Right? But if you didn’t
      spend that dollar every day and put it in a bank at 3% interest, you’d have
      $3,000 in ten years. Or $7,100 in 20 years. Or $20,000 in 40 years. So by
      choosing that $1 snack each day you’ve given up a new car when you retire.
      A good trade-off? Only you can decide.

      There’s also the possibility of trading money today for time tomorrow. For
      instance, you could use the money from those work day snacks to allow you
      to retire 3 or 6 months earlier than you would otherwise. Is it unusual to
      think of ‘banking’ a few minutes each day towards an early retirement?
      Perhaps, but it does give you a new perspective on spending.

      But, what about credit cards? Don’t they make it possible to buy both
      things that we want? Yes, you can use your plastic to do that.

      But credit cards are deceptive. They lead you to believe that you can spend
      more than you make. And, for a short time that’s probably true. But
      eventually you get to a situation where you can only afford the minimum
      payment each month. Once there, you’re back where choosing to spend on one
      thing prevents you from buying something else. And, you’ve also made the
      choice of paying interest to the credit card company on the monthly balance
      instead of having that money for other uses.

      So how can you use opportunity costs to help you live a happier life? By
      thinking of the alternatives before you spend your time and money. Even
      though something looks good, if you stop to compare, you might find
      something else that you’d prefer to spend your time or money on.
      __________

      Gary Foreman is a former financial planner who currently edits The Dollar
      Stretcher website <” >http://www.stretcher.com> You’ll find thousands of articles to
      help you make the most of your time and your money. Visit today!

      [Non-text portions of this message have been removed]

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Budget101 Discussion List Archives Budget101 Discussion List New Article: Lost Opportunities