Most of us crossed paths with the phrase “opportunity cost” in economics. It is a concept we are all aware of regardless of whether we use that term to coin it.
Its literal translation is the loss of potential gain from other alternatives when one alternative is chosen.
Everything in life has an opportunity cost and it stems from the fact that we live in a finite world.
Time, money and coincidentally enough, opportunities are limited and having an awareness of such will allow you to use them where you will receive the greatest value.
Every single day, every single minute, every single second is an opportunity cost that could be spent elsewhere.
The same goes for all other resources.
My “eureka” moment came from applying this concept to all decisions. This began with small daily purchases to large purchases such as a car and a home to allocating my time to where I would get the greatest return – happiness and value were the main factors.
I understood how a small purchase every day – could be coffee, red bull, lunch – adds up over the year, let alone a lifetime (Do the math. I guarantee it will help conceptualize it). I then took it and ran with it. No need for a car the salesman says “I could afford”. No need to max out or exceed some threshold the loan officer “approved me for” when purchasing a home.
This thinking allowed me to surpass the short term rewards in life to grant me access to what was really valued – travel, financial security, experiences over material items. This led me to remove major barriers and hurdles from the ultimate goal of being financially liberated.
I must mention that it is also quite liberating not playing the “keeping up with the Joneses game”. If you’re playing the game, pull yourself out. There are more fulfilling and rewarding games where a true end is in sight. The former has no end.
Use this concept before making decisions. It often will shed light on your perspective of what is important to you.
Pursue something that will give you maximum utility with the finite resources you have.