Lost Opportunity Costs - The Definition
"Lost Opportunity Costs" represent the cost of something in light of an opportunity forgone. Obviously, if we spend money on one thing, we forgo the benefits we could have derived if we spent that same money on something else.
Lost Opportunity Costs - The Application
Lost opportunity costs apply in all areas of our lives. For instance, if I determine to do one good thing with my time on Sunday morning (go to church), I can't do another good thing with that same time (hike in the mountains). The uses of my time are mutually exclusive. By definition, my choice to pursue one opportunity (church) represents an "opportunity cost" with respect to the other opportunity (hiking). Hiking represents a lost opportunity cost for me on this particular Sunday. Of course, if I choose to sleep through my Sunday morning and pursue neither activity, my inaction also represents a lost opportunity cost.
Although we don't make a habit of moment-by-moment assessment in our daily lives, calculating lost opportunity costs is vital when assessing our financial lives. If we're not assessing the true cost of any course of action, we're setting ourselves up for some big financial surprises.
For instance, if I save money to purchase a car, I make the decision to exchange my cash for a car. In doing so, I forgo the interest I could earn on my savings account to avoid the interest I would otherwise pay to a financing company. Of course, most people would applaud the idea of paying cash for a car to avoid the financing costs. However, a true assessment of the transaction requires a true accounting of the lost opportunity costs.
OK, what if you could "have yourcake and eat it too?"
What if certain opportunities in life weren't mutually exclusive?
In our Sunday morning example, what if I could hike to a lakeside church in the mountains? No lost opportunity cost! In our car purchase example, what if I could borrow from myself and pay myself back the interest that would have been lost and earn tax free interest on the money I borrowed to buy the car? No lost opportunity cost!
Sound impossible? Well, it isn’t if you utilize PEI’s “Be the Bank”™ Process.