Know your opportunity cost

  • Published
  • By Maj. Michael T. Bryant
  • 71st Comptroller Squadron commander
Everyone knows how to calculate the cost of buying something. First, you want an item. Then you shop around, find the best price, buy it, and add sales tax if necessary. Then it's yours, with the numbers on a receipt that show how much you paid.

What the receipt doesn't show you is "opportunity cost."

Opportunity cost is the cost of not being able to do something because you are doing something else. In other words, the price of the road not taken. For example, the opportunity cost of buying new furniture for your living room might be the value of a summer vacation. While new furniture involves larger dollar amounts, even small spending decisions include an opportunity cost.

I can attest to this personally with my addiction to Starbucks coffee. In the early 2000s when Starbucks coffeehouses where popping up everywhere, I reluctantly went with my wife to see what all the hype was about.

At the time, I was perfectly content with my plain "cup of joe" brewed at home and told myself I didn't need one of those overpriced "froufrou" coffees.

After my first sip of a café mocha, I played off the taste to my wife and told her it was "okay," but deep inside I knew I was hooked. I quickly found myself sneaking to Starbucks whenever possible for a fix, and it didn't stop with me. It soon became a family affair. The kids discovered the coffee-free cream based "frappucinos" and before I knew it, the whole family was hooked. At the height of our addiction, we were spending $100 a month.

In the back of my mind I knew I was spending a lot of money on this froufrou coffee that I had once made fun of people for drinking, but didn't realize the magnitude until I sat down and ran some numbers. Over a one year period, I spent about $1,200 at Starbucks. If I had invested that money at 8-percent interest, I would have over $13,000 extra for my retirement nest egg at age 65.

Another option for the $1,200 could have been to pay down credit card debt. Not only would the $1,200 pay down some of the outstanding loan amount, it would also lower the amount of interest paid.

Now I'm not saying live poor to die rich or start depriving yourself of everything except the basic necessities -- just understand the big picture consequences of the decisions you are making. In my case, deciding whether to buy a $5 cup of coffee did not require deep thought or analysis. If I bought that cup of coffee four days a week, the expense quickly adds up and that amount is definitely worth analyzing.

To some, routinely enjoying life's simple pleasures may well be worth not having the extra savings at retirement or lower credit-card balance. That's fine, as long as you understand the effects of your actions.

The concept of opportunity cost applies to more than just money. It applies to life. The opportunity cost of talking to your troops to get to know them better might be leaving work later than normal. If you golf once a week, the opportunity cost is four hours of lost family time. The opportunity cost of eating in front of the TV is lost dinnertime conversation.

I'm not trying to tell you what to do. Just realize the lost opportunities from the choices you are making so you can make better informed decisions. Evaluate your choices based on your financial needs, wants and life goals and then use your time and money in a way that will benefit you the most.

And for goodness sakes, think twice before buying that overpriced froufrou coffee.