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MAKE IT MAKE ¢ENTS

Decisions, Decisions:
Understanding Opportunity Cost

APEF: Solving the Financial Illiteracy Crisis

Do you ever get that sinking feeling after purchasing that expensive jacket you had your eye on, or regret skipping out on a study session in favor of socializing instead? Those feelings could be the reverberations of opportunity cost– a term in finance that means every choice you make has a hidden price tag.

What is Opportunity Cost?

 

Opportunity cost is the value of any potential alternative you have to give up to go after a specific choice. In simpler terms, when making decisions you are giving up potential advantages offered by other options available - this concept acts like a hidden cost associated with every choice made.

Every Decision Has a Cost:

Imagine you have $50 and are debating whether to spend it on a new video game or save it for a concert ticket next month. If you choose to buy the video game, your decision has an opportunity cost, which would have been the fun you would have experienced at that concert with friends; conversely, if you choose to save for the tickets, that opportunity cost would have been the immediate joy you’ll miss out on from playing the new game. Every decision comes with its own trade-offs.

Long-Term Implications:

Understanding opportunity costs is about more than making immediate choices - it involves considering future effects as well. As a high schooler, you’re going to face decisions regarding education, career paths, and personal finances. For example, you could spend your summer working part-time in a local shop instead of taking an unpaid internship in your chosen field. Sure, you’d earn some money, but the opportunity cost might be the experience and skills gained from the internship, which could boost your future career prospects.

Soft skills refer to a set of personal attributes, behaviors, and social attitudes that enable individuals to interact effectively with others in a workplace or social environment. These skills are essential for building healthy relationships, communicating effectively, solving problems, and collaborating with others.

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Tips for Making Informed Decisions:

  • Before making any decision, always research all available options and understand the cost implications. Knowing what you are giving up is the first step in understanding opportunity cost.

  • Carefully consider all potential outcomes of each alternative you're considering. What benefits will you gain, and what will you sacrifice?

  • Understand your short-term and long-term goals. Prioritize them and align your decisions with what matters most to you.

  • Time is a valuable resource. Some opportunities may be time-sensitive and by postponing decisions too long, you can risk forgoing those opportunities altogether. For example, you might not be thinking much about your retirement now, but imagine looking back when you’re in your 50s wishing you would have invested $50 a month in a mutual fund rather than spending it on daily lattes at the coffee shop. Investing that $50 a month over 37 years at 10% interest would be $199,723.89!

  • Accept that not every decision you make will be perfect, and use those choices as opportunities for growth in future decision-making processes.

In the world of finance, opportunity cost is a guiding principle that can help you navigate many decisions. Remember, opportunity cost isn't about guilt or depriving yourself of immediate joys! By understanding the trade-offs associated with each choice, you can make informed decisions that align with your goals and aspirations. Life is all about balance!

 

Bonus tip: Develop opportunity cost awareness! Create a list of potential decisions you face each day (studying vs. gaming, saving vs. spending) and write down their opportunity costs; this way, you'll begin to see how understanding these hidden costs can help you make smarter choices!

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