Opportunity cost is one of the most important concepts of money. Simply put, opportunity cost is the amount you give up to make a spending decision. Because of the finite nature of resources, you cannot make two spending decisions at the same time. You have to give up one choice in exchange for another. The best spending decisions are done with opportunity cost as one of the most important considerations.
Every time you spend your money, think of what other things you can spend your money on. Once you make the decision, the amount of money or the choice you give up is gone forever, whether you are making a large or a small purchase.
For instance, you want to purchase a big TV set so you put in money to your savings every month. When the time is up for you to purchase the TV set, an offer was made by a local travel agency for a cruise to the Caribbean at half the regular price. Coincidentally, the amount of the cruise is the same as the amount of the TV set of your dream. Which should you choose?
While it is true that you can always earn more to buy the TV and go on a cruise. Yet it would take much time and effort to do that. Perhaps you would say, “I can go on a cruise now. I will save again for the TV. Anyway, there will always be a TV set available for sale in an appliance store.”
Opportunity cost allows you to prioritize your spending. Just begin to think about what you really want to do with your money. Spending your money on unimportant things will diminish your financial capacity to do what matters most to you. Your opportunity is gone because you have spent your money on things you are not really interested in.