Opportunity Cost

When you were a child, what could a dollar buy you? In my day, a dollar would have got me a soda and a bag of chips. Nowadays, maybe just the soda. Ask my father, and he'll tell you about the time he could enjoy the whole weekend (food, gas, entertainment) on a buck. (loco moco was 50 cents, gas at 27 cents a gallon, and a shave ice was a dime)

What is the value of your time? If you work at a salary job, do you know how much you're getting paid per hour?

I did not do well in college economics but there was one concept that stuck out like a sore thumb and it is something that has never left me. That was the concept of "opportunity cost."

Opportunity cost is defined as: 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 alternate action.

A linear example would be a castaway on a desert island who is either capable of catching 5 fish a day or picking 10 bananas. The opportunity cost of producing 5 fish is 10 bananas. (Of course, life doesn't work quite this systematically.)

Another example would be this column. Right now it's Saturday and I'm sitting at my computer typing. The opportunity cost is the infinite amount of other activities I could be using my time for.

Relevancy to the dollar

I've come to realize that for most people, unless they are the middle of a monetary transaction, they have no concept of what a dollar is worth.

The truth is that every day, every hour, every minute that goes by, the value of your dollar is fluctuating. My belief is that if more people understood this, they would behave differently with their finances.

An example of what I'm talking about are instances of people carrying large debt (car loans, credit card debt) while socking away money in the bank every month.

The opportunity cost of putting your money into the bank is the cost of the interest charged to the money owed to creditors. The smarter move would be to pay down the debt with the highest interest before putting away money.

Another opportunity cost of putting your money into a savings account is the greater interest you could have been earning in other investments during the same time period.

Most people don't have the time or the interest to learn the intricacies of interest rates and financial trends. Take the initiative to talk to a financial planner or someone who understands these concepts. They will be able to help you prioritize your finances so that your dollar will work to its fullest potential.

Relevancy to every day life

Feeling stressed out? Are there not enough hours in the day?

In previous columns we've discussed goal setting and planning for the future.

Many people fall into the trap of trying to "do it all." I'm speaking from experience. In high school I was in student government, played music, was part of a canoe club, tried to be at every social event, etc. Once my band started becoming successful we tried to make every gig, do every charity event, and I was still trying to get through school. In both cases, I can remember being late a lot, not having my own life in order and being stressed out all the time. In the end, it almost cost me my educational career.

One of the most important lessons I've learned in life (so far) is that it's very difficult to help other people when you're not helping yourself first. This cannot be done until you've done some honest thinking and seriously decide what is important to you.

Using the concept of "opportunity cost" on a short term basis can be a tool utilized toward achieving your goals.

Before you leave the office or before work starts, take 15 minutes to chart out your tasks for the day. Each one you complete will be the opportunity cost of something that you did not have time for. Are they relevant to your goals?

Creating sanity in every day life is like shooting a basketball. There are some people who are just naturally good at it. However, those of us who are not gifted in that area will get better with practice.

Have a Merry Christmas and a Happy New Year!

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