Opportunity cost is the value of what you gave up when making a decision
Example of opportunity cost?
If you want to invest in real estate or buy a car and then decide to buy a car. Your opportunity cost of buying a car will be the revenue or profits you could have earned by investing in real estate.
Every choice we make has an opportunity cost. This is because every choice has a value and when we make a choice we essentially give up value on a particular choice. Opportunity cost doesn’t always have to be more than whatever value is gained by the choices we make.
Value has two parts to it.
Cost and benefits.
By looking at choices in terms of benefits and costs we will be able to make the better economic choice.
To make a good economic decision we will need to choose the option with the greatest benefit to us and the lowest cost.
A more practical example of opportunity cost in your financial life.
When you carry a balance on a credit card your opportunity cost is the interest you could have from a savings account by using the money to clear interest charges on your credit card and putting it in a savings account.
Carrying a credit card balance also means you now no longer have emergency funds on your credit card due to you spending this money.