Examples of opportunity costs in personal finance

What is "opportunity cost?

 Opportunity costs represent the potential benefits an individual, investor or business misses out on when choosing one alternative over another. They are typically unseen and are often overlooked because they aren’t a cost that you will see, but opportunity costs exist.

Examples of opportunity costs are:

-        -Taking a Two-Week Vacation to Las Vegas to Gamble instead of investing…

-        - Investing money instead of using it to buy insurance…

-       -  Buying insurance with your money instead of saving it and having it available for emergencies or to take advantage of opportunities when they present themselves.

For example, if you had $10k sitting around and decided to blow it all on that 1-week Vegas vacation – it would probably be gone (of course, when you go, you will convince yourself you "will turn it into $10 Million.)

If the week after you get back (broke probably), and you happened to stumble upon a deal where you needed that $10,000 you just blew to buy something you know you could turn around and sell for $50,000 – you wouldn’t have the money available to do it anymore…

That $40,000 you couldn’t earn because you didn’t have the money available was the opportunity cost of your vacation.

Opportunity Costs Impact on Personal Finance and Investing

When making a choice on using money to either build or protect wealth, you will usually be exposed to opportunity costs as well.

For example, investing in one stock takes away the money you have available to invest in another stock.

Opportunity cost has to do with the fact that we all have limited resources, and the choices we make to do one thing with our money take away from our ability to do other things with it.

Now, let’s talk about INSURANCE…

If you hand over money by paying a premium to an insurance company but never have a claim, you may feel like you wasted all that money.

You should be happy you didn’t have any problems, but that isn’t how people think.

You will likely start imagining what you could have used that money for and how much more you would have if you didn’t “waste your money” on that insurance.

When I am faced with a decision like this, my right-brained analytic self will start to think, “what is the probability that something will happen?”  Those probabilities are likely low, and I think about how much extra money I might have if I don’t buy it.

Do you do this too? If so, I get it, LOL! It is natural. More on that in a minute…

Handing money over to an insurance company drives people nuts. They know insurance companies make a lot of money and the only way they can do that is by NOT paying out too much in claims.

Buying insurance is like making a bet on some event you hope, and don’t think, could ever happen to you…

HOWEVER – If you ever decided to forgo insurance AND the peril that the policy would have covered does happen…

…I am 100% sure that you will wish that you had purchased the coverage.

In fact, the opportunity cost of not having the right coverage could mean YOU END UP LOSING EVERYTHING, and that is too great a risk to leave you, your family, and, if you are a business owner, your business exposed to.