When thinking about important financial decisions, we usually focus on what something costs. But there is another cost that often goes unnoticed: opportunity cost.
Opportunity cost is what we give up when we choose one option instead of another. For instance, if we buy a new $1,500 phone, the money that went there is money not being invested. Or if we keep money in a savings account that charges a $5 monthly maintenance fee, that is money we are currently losing that could have been saved or even grown in an account that earns a small return instead. All these micro-decisions add up and can lead to a lot of lost, or gained, potential value.
Money kept in one place is money not working somewhere else. And because money can grow over time, the longer it stays in a less effective place, the larger that missed opportunity becomes. This is actually a concept many businesses use when deciding how and where to grow.
With personal finances, this does not mean every dollar needs to be invested or moved constantly. After all, we work hard for our money and should enjoy some of it. But it does mean our financial choices always involve trade-offs, even when they seem small.
So before deciding where to keep our money, ask a simple question:
“What are we giving up by leaving it here?”
Sometimes it may be worth it. Other times, maybe not.
