Consider the opportunity cost

Photo courtesy of gobucks2

 

I’m sitting here waiting to pull the trigger on a short trip to the Caribbean. Just a few days, nothing too fancy. I have some free hotel night awards, one of which I need to use before the end of the year, and it’s hard to think of a better place to spend a free hotel award than on a tropical island.

But I’m hesitating.

Frankly, I’ve been hesitating for a few months now. This is because I’ve been thinking about opportunity cost.

Opportunity knocks

Let’s define some terms. The opportunity cost of a choice is, according to Wikipedia: “the value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources.

Oh Wikipedia, you’re so erudite. Put more simply, opportunity cost is the assessment of what you could have done. In a financial sense, it’s what you could have spent money on. In a social sense, it’s how you could have spent your Saturday night. That’s all.

Everything we do has an opportunity cost. choosing to do something, we choose not to do something else. For example. When I moved to Portland, I forewent all the possibilities that living in New York City could offer. (To say nothing of all the other places I could have lived.)

When you spend money on something, such as dinner out or a new TV or a trip to the Caribbean, you forgo all of the other things you could be spending that money on.

Who’s there?

So how do you consider the opportunity cost? There are many ways, some more rigorous than others, but the way I do it is to iterate all the reasons for doing something, and then iterate the other things you could be doing instead. Then compare.

So let’s take a look at the my particular situation, the late-autumn trip to the island of St. Maarten:

Reasons to go:

  • I have the money. Pretty much all I would need to pay for is the plane fare, and incidentals like food. I won’t have to put any of this on a credit card.
  • I have the time. Not much to say about this one. There is nothing preventing me from going for a few days. I’m very grateful for that.
  • This is a new place. I’ve never been to anytwhere in the Caribeean before, and it sounds lovely. Not just because of the weather, but because of the scenery, hiking, and culture to be found there.
  • I love Portland, but November is probably the most depressing month out of the year here. Not only are the days alarmingly short, but the usual drizzle crescendos into a pitiless downpour. I went to Hawaii last year during this time, and found that a few days in sunshine were a tremendous buffer against this impending dreariness.

Now, what could I be doing instead? You can think about this in terms of both time and money. As time is short here, though I’ll just delve into the money aspect (but don’t forget the time aspect when making your consideration):

Where I could put this money instead:

  • Into savings. I’ve already got six months of emergency fund, but I’m also a big fan of sinking funds. If I know I’m going to want to buy a $600 thing in six months, then I like to put away $100 a month for it.
  • Into other spending. My apartment needs some livability improvements. I’ve moved on from when all I had was a camp chair, but it’s not the comfortable hangout place I wish it was.
  • Into retirement. I put a lot of money away in retirement, but our casino-esque system of retirement planning means that one pretty much can’t put enough away. I like the 15% rule, and am roughly at that point now, but depending on your temperament, you may feel like that is not nearly enough.
  • Into other travels. Instead of spending on this adventure, is there another adventure, either now or in the future, that I could be working toward?
  • Into others. Don’t discount this one. charity: water, Kiva, your local community, etc.

Too much decision making

Now, there is a limit to how much opportunity cost analysis we can do. You can easily become paralyzed (or, worse, perfectionistic) if you constantly consider that there could be an alternative path that could be better for you. Given the universe of possibilities, there probably always will be a “better” option. But what does “better” even mean? Any decision you make is going to have some aspects that are better, and some that are worse. There are too many to know them all.

So in my estimation, the best choice for you is not the best possible option, but the one you eventually pick.

But enough about me: What opportunity costs are you considering? How can I help?

Mike Pumphrey

Mike Pumphrey

I'm the founder and author of Unlikely Radical, a site to help people succeed with money, achieve their goals, and live intentionally.

I offer a free phone consultation to anyone who is interested in changing their financial narrative. Are you ready? Click here for details.
Mike Pumphrey
Posted on October 14, 2013