Opportunity cost is frequently calculated by investors when evaluating portfolios, but let's take a look at how opportunity cost can (and should) be calculated in our everyday lives. The easiest way to do this is to apply the concept of opportunity cost to the time we allocate for certain activites.
Opportunities Everyday
It shouldn't be news to anyone that we make decisions every single day. What time we get out of bed, what we eat for breakfast, how long we take in the shower, and how fast we drive to work are all decisions that some of us make within the first hour we are awake. Most of us go through these tasks and do not consider if what we are doing is the best use of our time. It is what we have always done and it is what we plan to do until something changes. However, if you take a step back to look at what you're doing, you may be surprised at what you're missing out on!Opportunity Cost Everyday
Here is an example. Many people enjoy stopping at their favorite coffee shop for a caffeine boost before going into work. What is the true cost of that coffee? Well, the cost that we feel in our wallet is the amount we pay at the register plus the opportunity cost of the interest we could have made had we invested it instead. This is fairly straightforward to calculate and countless articles have shown just how much money we are spending for our coffee. What isn't as obvious is the opportunity cost of the time we have spent getting our java fix.Let us hypothetically assume that stopping for that cup of coffee each morning takes 10 minutes. This includes the time spent pulling off the road (possibly going out of your way), getting out of your car, waiting in line, etc. In other words, if you did NOT stop for coffee you would arrive at work 10 minutes earlier.
What if getting to work 10 minutes earlier each day meant that you arrived before your boss and this made a positive impression on her? What if it meant you could respond to emails and phone calls before your coworkers arrived, giving you a jumpstart every single day? Do you think your boss would notice this? If she doesn't, you could always use it as leverage when you ask for your next raise.
Not a workaholic? That's ok too! You could use this extra time in the morning to stretch, meditate, or spend a little quality time with your family (perhaps eating a healthy breakfast together). The health benefits of doing any or all three of these activities has been proven time and time again.
Calculating opportunity cost is not just for coffee drinkers! If you are spending two hours in front of the television or surfing the internet every night, that's almost the same amount of time needed to take a college course. It's also more than enough time to visit the gym, play with your children, volunteer, or start a small home business.
Some people claim they need their morning cup of coffee or their time to unwind in front of the television. This obviously isn't true (I think they would survive). However, it does bring them a certain amount of short-term enjoyment. While it's important to enjoy life, it's also important to understand the trade-offs of the decisions you make each day. When was the last time you told yourself, "I sure am glad I watched that television episode five years ago!" Never? Well, if you stick with it I can almost guarantee you that you will be happy about starting with that gym membership, college course, home business, or volunteer work five years from today!
What are you waiting for?!?!