opportunity cost

Opportunity cost, saving money, and living your rich life

If you want something, you HAVE to give something up to get it – whether that’s time, money, effort, etc. You have to make sacrifices…you can do anything if you set your mind to it, but you can’t do everything. You will have to pick and choose what is most important to you because by saying yes to one thing, you are inherently saying no to something else. It’s opportunity cost.

For example, if you want an expensive new car, you have to give up money to get it. To earn enough money, you have to work for it (trading time and effort for dollars). You’ll also have to save up for it (also costing time, because it won’t happen over night, and effort, because you might be tempted to spend money on other things). So if you also want to go on vacation, go out to eat all the time, go on a shopping spree, etc., but you don’t make enough money, by saying yes to those other things, you are saying no to getting that dream car.

You can’t have all of the toys and live the “rich” life without PAYING for it. What you need to do is redefine what is a rich life for you (it’s different for everyone). Living a rich life doesn’t necessarily mean you have to spend a lot of money. It does mean that you’re allowed to spend money on things that matter most to you though. Life is meant to be enjoyed. When you die, you can’t take that money with you.

But the problem for most people isn’t having too much money leftover when they die, it’s not having enough for their later years. Most people mindlessly spend money on things they don’t really get enjoyment out of. They do this all of their lives. Stop doing this! If it’s not something you truly care about, cut it out of your life or buy off-brand. Save money for the things that matter most to you and when you do spend on something you’ve been saving for, don’t feel regret.

The sunk cost theory

Always keep the “sunk cost theory” in mind.

Are you doing something because it actually makes sense – because you want to do it or because it is providing some value to you or serving a purpose? Or are you doing it because you’ve already “invested” so much time, money, or energy doing it and you think about everything that would have been wasted if you quit now?

In reality, you can’t get back the time, money, or energy you’ve already spent. You can’t recoup that. So the question becomes, are you willing to waste more time, money, and energy now just to see the project through? Are you willing to “throw good money after bad?”

Take a step back and ask yourself this question… “If I didn’t have ANYTHING invested in this and I have all of the information that I have today, would I still invest in doing this task?” If the answer is no, then it’s probably best to let it go.

We only have a finite amount of these resources. When we say “yes” to making suboptimal choices, we are inherently saying “no” to making better choices. We can’t be in two places at once. Most people have to make either/or decisions when it comes to buying things because we don’t have unlimited money. And our energy waxes and wanes, but if we keep beating our heads against a wall and doing things that don’t serve us or energize us, we will feel depleted of energy long before we need to. Don’t continue to do something that doesn’t work just because you have a sunken cost – it will only cost you more time, money, and energy in the long run.

If you’re saying “yes” to one thing (and this applies to anything in life), that means you are saying “no” to something else.

What is your opportunity cost? We can’t be in two places at once. We only have so much time in the day. We have limited resources. So by saying yes to one thing, it is costing you the opportunity to do something else.

Choose what you spend your time, energy, and money on wisely. If you always want to do what feels good in the moment, you may be sacrificing the well-being of your future self.

Being proactive

Do you know the worst part about trying to be proactive?

You can’t quantify the results. How can you say that you saved “x” dollars or “y” lives for an event that didn’t happen because you took action to prevent it from happening? And how do you absolutely know that if you hadn’t acted the way you had, that an event would have played out the way you thought? There are no guarantees.

But you can’t look at it that way. You have to take the best action you believe possible with the information you have at hand. Because what’s more expensive? Going to the doctor AFTER you got sick? Or NOT having to go to the doctor because you took care of yourself?

You might as well pay a little more right now to use a gym membership, to pay for and eat healthy foods, and to sharpen your mind. At first, it’s more expensive than sitting on the couch, eating potato chips, but what are your future costs? Try to be proactive and make the best decisions not only for the now, but also for the future.

Opportunity cost and the Kaizen method

There are trade-offs in everything you do. It’s called opportunity cost. Because you are spending your time, energy, or money on one thing, that means that you cannot spend that same time, energy, or money on something else. You do not have an infinite supply, therefore your actions are costing you the opportunity to do something else. You must choose what your priority is and focus on that. Take this into account when making daily decisions. You don’t always have to make the most efficient or effective choice, but if you regularly decide to practice inefficiency and ineffectiveness, it will eventually catch up to you.

One process to combat this is called the Kaizen method. Kaizen focuses on applying small, daily changes that result in major improvements over time. Thought about in another way, if you can improve yourself even fractionally (.5%, for example) each day, imagine how much better you’ll be in 5, 10, or 15 years.

The opposite is also true. If you get just a little worse each day, you won’t be able to tell at first. But after getting fractionally worse over a period of 10 years, you’re going to look in the mirror and wonder what happened to yourself.

Don’t be the person who peaked in high school. Understand that there are trade-offs in every decision you make and try to improve in something each day.