GLOSSARY · BUDGETING, SPENDING & SAVING
Opportunity cost
The value of the best alternative given up when money or time is used one way rather than another. For spending, it is often what the same money would have become if saved or invested, which grows with time because of compounding. People tend to overlook it unless the alternative is made explicit.
Also called: trade-off, what else the money could do, the cost of the next best use
FORMULA
Opportunity cost of a recurring expense ≈ what the same amount, invested each period, would grow to
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CHAPTER · EXPENSE TRACKING & AWARENESS · FOUNDATIONSFinding the Costs You Never SeeCHAPTER · EXPENSE TRACKING & AWARENESS · FOUNDATIONSNeeds, Wants and the Space BetweenRELATED TERMS
SOURCES
- Opportunity Cost Neglect. Frederick, Novemsky, Wang, Dhar & Nowlis, Journal of Consumer Research, 2009.