January 4, 2015

What is opportunity cost? Why is it so important to understand this concept? Example?

3 thoughts on “January 4, 2015”

  1. Brennan Haag says:

    Opportunity cost is the loss of potential gain from alternative investments when another is chosen. An example of this is if you invested in gold. One year the value of it might go up a few percent and that’s it, while if you were invested in mutual funds it could of when up more and you would of got dividends. Another example of this is if your paying a lot every month on car payments for an expensive car you bought. You are not only paying the cost of the car but you are also loosing money because you could of had that money invested instead of paying for an expensive car you didn’t really need. It is important to know what opportunity cost is before investing to make sure your investing your money the best way you can.

  2. Garrett Haag says:

    Opportunity cost is what you have to give up to get something. The opportunity cost of a purchase is the income that money would have made you if you had kept it some place. Or the ability to buy something else is also the opportunity cost. A major time when opportunity cost comes in to play is when you buy a house or car. You take your savings/investments to make this purchase. If you put down $50,000 on your down payment you dont have that $50,000 working for you anymore. You may avoid the interest on that sum of money on the loan but you lose the chance to make a return above that interest rate. This is why many people only make the minimum payments on low interest rate debts so there money can stay invested and working for them.

  3. Mike Finley says:

    Great job, gentlemen. Let’s review.

    When considering any type of decision that deals with money, always consider multiple options. Sometimes paying down debt is wise, sometimes it is not. Sometimes investing your money in those no-load index mutual funds is a better option as you shelter them from taxes in your company retirement plan or Roth IRA.

    The key here is to step back and review your options very carefully as you understand that there is no one size fits all approach to handling money. Educate yourself carefully and opportunity costs will become a natural way of looking at your money and how you are going to handle it this day, this week, this month, this year, and this decade. YOU are the answer!

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