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OPPORTUNITY COST - WHAT SHOULD I DO WITH $300?
Understand opportunity cost and how small tweaks in your mindset can lead to big results for your investments.
Assume You Have $300 to Spend and You Produced the Following Three Options:
1) Buy Jordan’s (Shoes) for $300
2) Buy starter shoes (Wal-Mart Specials) for $50, 2 Nike shares for $100/share and save the rest
3) Purchase 3 Nike shares for $100/share
We expect the Nike stocks to appreciate 7% per year, savings to return 1% per year and the shoes not to result in an increase in monetary value.
Having these three options available, let’s say you produce two precisely defined decision criteria:
1) Having comfortable shoes (rating comfort on a scale from 1 to 3)
2) a return on the money (based on expected return, 1 point per $5 return)
Let’s analyze the value of each option:
| Options | 1) Buy Jordan's for $300 | 2) Buy starter shoes for $50 and invest/save rest | 3) Purchase 3 Nike shares at $100/share |
|---|---|---|---|
| Criteria 1: (Shoes) | Super comfortable quality shoes (3 points) | Comfortable, okay shoes (2 points) | No shoes at all (0 points) |
| Criteria 2: (Return) | $300 - $300 = $0 (0 points) |
Return of shoe: $0 Return of stocks: $200 * 7% = $14 Return on savings: $50 * 1% = $0.50 Total: $14.50 (2 points) |
$300 * 7% = $21 (4 points) |
| Result | 3 points: Great shoes but no return | 4 points: Okay shoes and $14.50 return | 4 points: No shoes and $21 return |
Quantifying Your Criteria for Better Decisions
By quantifying each of your criteria, you can easily reach a well-informed result. Understanding the
opportunity cost allows you to reflect on whether your initial preference
is truly the best decision. This is a personal decision that varies from person to person.
Example: Option 2
Return: $14.5 Opportunity Cost: $21 (Option 3) - $14.5 (Option 2) = $6.5
Key Points to Consider:
1. Quantify Your Criteria:
Assigning points to each criterion makes decision-making straightforward.
2. Evaluate Opportunity Cost:
Knowing the potential returns of other options helps you make informed choices.
3. Personal Reflection:
Assess whether you are confident with your decision or if you need to rethink it to better align with your goals.
In Summary
Using points to evaluate your options helps ensure your decisions align with your financial goals.
Reflect on the opportunity cost to see if your choice is the best fit for your needs.