Cost is not just a function of what you pay for something. When you spend your resources on anything, you’re also giving up the ability to pay for other things, too.
Imagine if you spend everything left after bills in your monthly budget on clothes or dining out or entertainment. You don’t save any money. Three months from now, a friend calls about an exciting trip they want you to join them on in a week! But, you don’t have any money saved to dip into for the trip.
When you traded money for opportunities in the past, you forfeited your ability to use that money for opportunities in the future. This is called opportunity cost. And it applies to how you spend all your resources, not just money.
How does opportunity cost impact other resources?
Take time and attention for example.
When you say yes to one demand for time and attention, you’re saying no to every other thing you could have focused your time or attention on.
In other words, every time you spend your resources one way, you’re making a trade-off. It’s a choice that you value the thing you said yes to more than anything else you could have applied that resource to.
In the example about the trip with a friend, it’s evident how trade-offs impacted your life. But it’s not always so easy.
What about the opportunity cost of college?
Take college for instance.
You may consider college a great use of your time, attention, and resources. In this case, you expect your trade-off to deliver a return on your invested resources. Over the next four years, you hope to gain knowledge and skills which will enable you to earn you more money, increase the value of your time, among other expected benefits.
If you take on debt to cover the cost of college, you hope the return on your time, attention, and resources exceeds the cost to borrow money. Except let’s not forget about the trade-offs.
The debt you owe must be paid back. Which requires a commitment of your future resources – time, attention, energy, money. Good, bad, or ugly – a portion of your resources must now be diverted to covering the cost of an experience in the past.
But what if you had done something different?
If instead of college, let’s say you choose to get a job, work hard, gain experience, and develop skills. You avoid debt and save money. Four years from now, you are debt free with money in the bank, an income, and several years of experience. If you choose to change jobs, buy a house, start a business, travel the world for a year, or something else entirely, all of your resources are still available to commit.
In both scenarios, you make trade-offs. But those trade-offs do not impact only your current resources. Your choices also impact how you use your future resources.
You get to choose how you spend your resources.
The good thing is – decisions about how you spend your resources is up to you. But as you think about what your decisions cost, be sure to remember – it’s not just about the sticker price. It’s also about what you give up.
What trade-offs are you making?