The New Oxford
American Dictionary defines opportunity
costs as "the loss of potential
gain from other alternatives when one alternative is chosen".
Investopedia's definition:
1. The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.
2. The difference in return between a chosen investment and one that is necessarily passed up. Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment - say, a risk-free government bond yielding 6%. In this situation, your opportunity costs are 4% (6% - 2%).
Opportunity cost is a key concept in
economics, and has been described as expressing "the basic relationship
between scarcity and choice". The notion of opportunity cost
plays a crucial part in ensuring that scarce resources are used efficiently.
As I highlighted earlier, unless you have bottomless pit of money like the fictional characters of Gossip Girls, everybody needs to make continuous choices.
Investopedia's definition:
1. The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.
2. The difference in return between a chosen investment and one that is necessarily passed up. Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment - say, a risk-free government bond yielding 6%. In this situation, your opportunity costs are 4% (6% - 2%).
As I highlighted earlier, unless you have bottomless pit of money like the fictional characters of Gossip Girls, everybody needs to make continuous choices.
Your choices
will determine your life's positive or negative outcomes. You may not be able
to choose your family members or relatives but in money matters you can!
How do you make the right choices?
How do you make the right choices?
The key is to
be always aware of the opportunity costs.
In simple words, opportunity costs are the difference between your choice and the alternatives. It may not necessarily be only monetary in nature. Subjective matter can be a factor a well.
For example, you bought a house and now you are shopping for a housing loan. A local bank offered you a very competitive rate but you know that due to their high customer volume, they will be very slow in disbursement and their after sales service will not be very good.
A foreign bank on the other hand, offered you a slightly higher rate but you know that they have fewer customers thus the after sales service is tip top. Which one will you choose?
In simple words, opportunity costs are the difference between your choice and the alternatives. It may not necessarily be only monetary in nature. Subjective matter can be a factor a well.
For example, you bought a house and now you are shopping for a housing loan. A local bank offered you a very competitive rate but you know that due to their high customer volume, they will be very slow in disbursement and their after sales service will not be very good.
A foreign bank on the other hand, offered you a slightly higher rate but you know that they have fewer customers thus the after sales service is tip top. Which one will you choose?
There is no
right or wrong answers. It all depends on your priority. What is important to
you at that particular point in time.
If you're in a quest to accumulate as much money as possible within the shortest frame of time, then maybe you will choose the local bank despite its lousy after sales service.
If you're in a quest to accumulate as much money as possible within the shortest frame of time, then maybe you will choose the local bank despite its lousy after sales service.
But if you
value efficiency more then the foreign bank is a better choice.
The point that I'm trying to make here is before you make any decision, you need to consider all options and its related opportunity costs.
Another thing to remember is, once you have considered the options and its related costs, do not be so quick to dismiss things as irrelevant or make an excuse not to take action just because you think it will have a small impact on you.
I remember once I told an office mate to transfer money from one fund to the other to take advantage of the year-end dividend. It doesn't involve any hard work. Just go to the bank and do the transfer. It was a no risk proposition too. The answer I got was "I have very little money in that fund".
Few people understand that when it comes to Money Management, you have to start and take action now. How much money you have is irrelevant.
The point that I'm trying to make here is before you make any decision, you need to consider all options and its related opportunity costs.
Another thing to remember is, once you have considered the options and its related costs, do not be so quick to dismiss things as irrelevant or make an excuse not to take action just because you think it will have a small impact on you.
I remember once I told an office mate to transfer money from one fund to the other to take advantage of the year-end dividend. It doesn't involve any hard work. Just go to the bank and do the transfer. It was a no risk proposition too. The answer I got was "I have very little money in that fund".
Few people understand that when it comes to Money Management, you have to start and take action now. How much money you have is irrelevant.
What is the
difference between the amount of money you have and the amount of money Bill
Gates or Warren Buffett have?
Just the
number of zeros!
Practice makes
perfect. The more you practise to manage your money, the more comfortable and
familiar you are with it. It is better for you to start small. In the event you
made a mistake, the loss will not be so devastating.
Always
remember that procrastination and time are your greatest enemy. Take action
now!
How to find out about opportunity costs that affect you?
How to find out about opportunity costs that affect you?
This is where
you need to do some research and survey the market.
Is that a collective
sigh of deflated enthusiasm I hear?
We are lucky
that we live in the 21st century. You don’t even have to leave the
house to find food. It can be delivered to your house.
Similarly to
find out about financial products, all you need to do is just to google for it.
There are even some websites that actually compares the offers made by the
market players. How convenient is that?
Words of
caution though, do not be so naive that you believe every single thing that is
written in the internet. If it sounds too good to be true, most likely it is.
So do exercise
a little bit of common sense here. Do some facts checking and ask the experts
for opinion before you commit to anything.
Before I close this subject, please remember that hardly any situation remain the same for long. As such, your options and opportunity costs change over time. When that happened, you may need to change your strategy.
Before I close this subject, please remember that hardly any situation remain the same for long. As such, your options and opportunity costs change over time. When that happened, you may need to change your strategy.
So always be mindful
of your financial situation. Be flexible, be in the know and try to grab as
many good opportunities as you can when they passes you.