JagInsights › Glossary › Opportunity cost
What is opportunity cost?
Opportunity cost is what you give up when you pick one use of money over another. A worked example with a car payment.
Opportunity cost is the next-best use of the same dollars. Every yes is a no to something else, even if you never write the no down.
Worked example
A $500 car payment is not only $500. It is also the $500 that did not go to a card at 22 percent APR, or to the emergency fund, or to rent. If the card is charging $90 a month in interest, that is part of the real cost of the car.
Why it matters
People compare a purchase to zero. The honest comparison is to the next thing those dollars were going to do.
Questions people ask
Is opportunity cost the same as a fee?
No. A fee is money you pay. Opportunity cost is money you did not put somewhere else.
Should I always pick the highest-interest option?
No. Rent and food are not optional. Opportunity cost helps after the must-pays are covered.
Does this mean I should never have wants?
No. It means a want should beat the next use of the money on purpose, not by accident.
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