Think About Costs, Not Just Prices

Imagine you have $10 in your wallet (and no debit/credit card, for the sake of this exercise) and you have a choice between going out for lunch with your co-workers, or taking a taxi home instead of walking 5km in the middle of January. Lunch, good company and a full tummy vs. comfort, convenience, warmth and no frostbite. This is "opportunity cost"; how economists describe the value of something in a situation where you have to choose between different options, which provide different outcomes, with only limited resources. Which do you value more?

If you go out for lunch, then walking home in the bitter cold is the cost of that your opportunity. If you cab it home, then your opportunity cost is the pleasure of lunch with your co-workers. Because your money is limited, every decision to spend comes with some opportunity cost.

Here's something else to think about when you're trying to save. Rather than thinking about the price of a retail purchase in the abstract, thinking about opportunity cost helps you put the value of that purchase into context.

  • consider purchases in terms of the amount of hours you'd have to work to pay for something; for example, if your after-tax income is $10 per hour, then the opportunity cost of that $200 dollar pair of jeans is 20 hours of work
  • you can also think about purchases in terms of things you won't get to do or buy; for example, that daily $5 you spend on a morning coffee and muffin costs you $1,300; the opportunity cost of those coffees and muffins might be a well-deserved vacation

Either way, seeing opportunity costs helps to remind us that our dollars are limited and that every purchase is a decision. Thinking about the things we're giving up to make a purchase is a powerful way to curb unnecessary spending and a good reminder of the true cost of things.


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