What is opportunity cost and how do I calculate it?

What is opportunity cost and how do I calculate it?

Opportunity cost is the value of the next best alternative that you give up when making a decision. To calculate it, identify the options, determine the benefits of each, and subtract the value of the chosen option from the value of the next best alternative.

Can you give me an example of calculating opportunity cost?

Sure! If you have $100 and you can either invest it in stocks that yield a 10% return or keep it in a savings account with a 2% return, the opportunity cost of choosing the savings account is the $8 you would miss out on from the stocks.

How can opportunity cost affect my financial decisions?

Understanding opportunity cost helps you make better financial decisions by evaluating the potential benefits of different choices, ensuring you choose the option that maximizes your returns.

Are there any common mistakes people make when calculating opportunity costs?

Yes, common mistakes include ignoring non-monetary factors, failing to consider all alternatives, and not accurately estimating the potential returns of each option.