Many people believe that that staying the same is the safest option to avoid losing money. They think that by not risking anything, they lose nothing. But, by doing nothing you already losing. You lose time, your most valuable resource, along with the money and experience you could have earned if you had taken action. But have you ever wondered what the cost of the path not taken is called? It is “opportunity cost” – the hidden tax you paid when you choose comfort over action.
What is opportunity cost?
Imagine, you have 1 hours of free time, you can use that 1 hours to read Heralpha and gained some fundamental knowledge about finance or scroll social media.
Option A : you choose to read Heralpha and understand more about many types of investment and gain some knowledge about the difference.
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From option A you can gain an understanding about many types of investment and some knowledge about the differences. The opportunity costs are the entertainment and rest of scrolling media, which can relieve stress after a long, exhausting day.
Option B : you choose to scroll social media and gain some dopamine and comfort after a long day of working.
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From option B, you can gain instant relaxation and dopamine to keep you pleased and decompress at the time. However, the opportunity cost you just gave up is the knowledge that can help you understand the financial market and could help you invest in the future.
In short, opportunity cost is the best alternative option that you just gave up to do another thing. In this situation, it is either the dopamine you gained from scrolling or the knowledge you gained from reading Heralpha blogs.
The Hidden Math Behind Every Choice You Make.
In order to calculate the invisible costs you paid for every decision you make. There is a formula to calculate opportunity cost.
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OC (Opportunity cost): the cost of best alternative cost you overlooked.
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FO (Return on best foregone option) : the value of the option you did not choose.
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CO (Return on choosen option): the benefits of the option you have choosen.
For instance, you have $1000 in your bank account.
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Option A: Keep your money in the bank account without interest
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Option B: Put it in a safe Index fund with average interest is 8% annually.
The benefit of each options is:
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Option A: $0 without risking
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Option B: $80 but still in a safe fund.
If you choose to keep it in your bank account without interest because of the fear of risking, your opportunity cost is :
-80 is the cost of option you did not choose.
-0 is the cost of option you choosed.
If you choose to put the money in a safe Index fund, your opportunity cost is zero, because the option you did not choose does not have any benefits.
How to minimize your opportunity cost?
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Focus on “asymmetrical risks”
– Choose actions with a low opportunity cost but high potential growth.
– For example :
Cost: Short period of resting (low)
Gain: Financial information for investment (high)
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Time-value mapping
– Mapping the value of each resource you are going to spend.
– For example
Change your time into money like you can work for $20/hour, you playing for 2 hours equal to $40
Evaluate if your action is worth the money you gave up.
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The “24-hours rule” for big purchases.
– Before buying something with big value, staying and pondering for 24 hours if that thing is worth that amount of money.
– For example
You want to buy a ticket for a concert value of $200. Thinking if the moment you will spend during the concert worth $200.
If you value the moment for $300 and you bought it with $200, your net benefit is $100 and moment in a concert with good price.
In conclusion, understanding opportunity cost helps you make better decisions rather than being trapped by invisible cost. It empowers both business and individuals to maximize their profits and develop the critical thinking skill needed to navigate their future pathways.
“Remember, your youngest self is your most valuable asset. The opportunity cost of waiting until you’re ‘ready’ is the years of compound growth you can never get back. Start making intentional choices today, because every ‘Yes’ to a distraction is a ‘No’ to your future freedom.”
