March 28, 2014
What is opportunity cost and what does it mean to the average person when allocating their money for this and that?
What is opportunity cost and what does it mean to the average person when allocating their money for this and that?
Opportunity cost is the potential money you could make off of some money you spent on other stuff, opportunity cost plays a big part in the conversation about fees, when you pay fees, commissions or give up any of your money you will no longer be able to let it grow, lets say you lose 2% of your money in fees a year, you will no longer get interest on that and it will no longer compound. Opportunity cost also plays a part in investing when you are looking at buying something, such as a new car, all the extra money spent on that new car could have been used wiser and have been invested at Vanguard. Opportunity cost also plays in to your asset allocation, if you buy bonds you cant buy stocks with that money and vise-versa, opportunity cost is very important tot think about when investing, you don’t want to lose out on money you could have made by simply having lower fees or spending you money more wisely.
Well said, Garrett. Let’s review.
Anytime you make a decision with what to do with your money, you are making many other decisions on what you are not going to do with that money. At any moment in time this may seem like a small matter, but gradually over time, this becomes a very big issue.
Refocus your efforts on money spent vs. money saved. Also focus on costs when taking that money saved and investing it. Those decisions will provide us a pretty clear picture of what your financial future may look like. Make it a beautiful masterpiece!