Opportunity Cost is all about making choices, the opportunity cost is the cost of choosing option A over option B. We all make different decisions about how we spend our time and money.
Every time you make a decision opportunity cost is involved.
The term is often used in finance and economics when picking an investment over another, by measuring the economic choice compared to the next big one
Some examples of Opportunity cost:
Rather than spending your savings on college, you decide to invest it in a Company's stock. The opportunity cost is the increased earnings you would have made from getting a graduate degree, you choose to pass on the increase in earnings and put the money into stocks.
We have two investment options Company X and Company Y, we choose Company X. X returns 5% over the year ( which is not bad) but company Y returns 10% over the year. Thus our opportunity cost is 5%.
A Basketball player attends training over spring break. The opportunity cost was spring break.
If you have a side business and decide to focus on it over your regular job the opportunity cost is the wages lost from your regular job
As a freelancer working for $50 an hour, you decide to go out to a restaurant for 3 hours instead of working, the opportunity cost is $150
If you are considering a purchase which is for enjoyment reasons, that money could also be spent on investments.
There are many different types of investments.
A few things to take note of:
Investing your savings in paying off high-interest debt, could earn a return of over 10%
The Stock Market on average has a return of 10% in the long run.
Remember to include your sales taxes when entering expenditure amounts
Inflation is not accounted for in this calculator
Some Investments can have additional costs: operating costs, (electricity, utility etc), insurance and so forth
Opportunity Cost Formula: what you are sacrificing / what you are gaining = Opportunity Cost
How to calculate Opportunity Cost
Example 1: You are considering a luxury purchase of a brand new couch for $1,000 and you wonder what the opportunity cost is, if you put the $1,000 in investments.
We have our dollar amount at $1,000
Next the annual interest rate is needed, we are going with 5%
Finally the number of years, Let's say we are investing for 5 years
Year 1: `$1,000 \times 5% = $50`. `$50` was made in interest for the first year. Then add it to our total `$1,000 + $50 = $1,050`
Year 2: `$1,050 \times 5% = $52.50`. `$52.50` was made in interest for the second year. Then add it to our total `$1,050 + $52.50= $1,102.50`
Year 3: `$1,102.50 \times 5% = $55.125`. `$55.125` was made in interest for the third year. Then add it to our total `$1,102.50 + $55.125= $1,157.625`
Year 4: `$1,157.625 \times 5% = $57.88`. `$57.88` was made in interest for the fourth year. Then add it to our total `$1,157.625 + $57.88= $1,215.506`
Year 5: `$1,215.506 \times 5% = $60.775`. `$60.775` was made in interest for the fith year. Then add it to our total `$1,215.506 + $60.775= $1,276.281`
The amount of money earned in those 5 years: (starting money - money after 5 years).
`$1,000 - $1,276.281 = $276.281`
The opportunity cost is `$276.281`
This calculator is to help you find the true cost of a purchase when you spend money on things that are not essential. The total money plus the foregone interest earnings will be calculated as the real cost, giving you more information on the cost of each purchase allowing you to decide if it is truly worth it.
How to Use Opportunity Cost Calculator
1. Enter the amount in dollars of an unnecessary but or no investment type expenditure you are considering.
2. Enter the annual interest rate you believe you could earn if you invested the money instead.
3. Enter how many years you would let your investment grow
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