One of the greatest expenses you will ever have in your life is opportunity cost. I got this quote from Warren Buffett. Opportunity cost is basically related choices, choices in your life! In life you are bombarded with choices on a day to day basis.
Opportunity cost is defined as what benefits you could have received if you were to choose a different or alternate path. Opportunity cost is often used in investing. For example, putting your money in one investment such as a certificate of deposit times your money down when in fact you could have put it in a stock that you were looking at. The choice that you made is the opportunity cost.
In a quick summary… I like to think of opportunity cost as “what will it cost me in time, energy or money and also what could I accomplish if I do this one thing versus the other“. In a personal life example, let’s say you have an opportunity to go out camping for 5 days with a bunch of friends. The cost of this financially may only be $150, however the opportunity cost of 5 days that you could have spent on writing your book which could sell 100,000 copies could be millions of dollars. Or you could have donated your time to teaching kids an activity and change their lives. So you can’t look at opportunity cost as just a dollar figure. It is basically what else could you do in place of what you’re planning to do.
Opportunity cost in business
Opportunity cost in business is all too common. I see business owners all the time focusing and spending time on administrative tasks, doing things that the secretary could do, or things that they could have hired someone else to do. They may think that this saves them money by not hiring someone else, but the fact and reality of it is that if they hired someone to do it they would have more time to be able to do the more important things. Things within their business that only they can do such as grow it further or make important decisions. That is the opportunity cost. It costs you time to do all little crazy stupid things when instead you could be doing something so much better! Doing things that make a more meaningful impact!
We often get so wrapped up in doing things that are reactive versus proactive. We react to situations in other people’s problems instead of doing the proactive thing and being more productive were doing things that are beneficial to us and society.
I see this a lot when businesses slowly get slightly successful. I say slightly successful because the people that are slightly successful are the ones that are usually trying to take care of all the secretarial things. The person or the business that is very successful is usually doing the proactive things.
Take a look at the things you are doing in your business and see the opportunity cost behind the choices you are making.
Opportunity cost in life
On a greater know there are opportunity costs associated with life, not just in business. Imagine you have two choices. On one hand you have an opportunity to go see your grandma in the hospital who has been very sick with cancer and does not have long to live. On the other hand, you have a business deal happening where you have to go sign papers, a deal worth a few million dollars. You choose to go to the deal and you end up making a ton of money. However in that time-frame your grandma passed away. The cost of your choice and decision was the time that you did not get to spend with a loved one.
In life we don’t get these kind of choices that often. They are tough choices. We get things more like going out on a Friday night versus studying. Or you may go out on Friday night but you choose to go with one friend or do one thing versus another. This relates to the power of association and who you associate with can all be intertwined within the opportunity cost. Going out with one friend may cost you disconnect with another friend or even a friendship loss. These choices come up all the time.
This is why one of my favorite phrases is “the quality of your life is based on the choices that you make”
Leaning from Eminem – the Movie 8 Mile
There are many people who hate Eminem, some love him. If you have a chance to study him and watch the movie that was made about him (8 Mile), there is a lot you can learn about opportunity cost if you dig deeper behind the content and look at the context. At the end of the movie Eminem won a huge rap battle and his friends wanted to go out and party. He said that he had to go to work, and could not party tonight in order to save up for studio time. Giving up something good for something better in the future.
Okay there was a second opportunity in the movie just a few minutes later where one of his friends asked if he wanted to host the club with him. He said that “we could host the rap battles together, everybody would know you, everyone would respect you” and he said “no man that’s your thing. I think I just kind of gotta do my own thing.”
How is that for opportunity cost? He had a few opportunities that he could have taken. He chose to do something else and now has become one of the biggest rap stars in history. Good for him! I’m happy for him.
Instant gratification versus delayed gratification
One thing you have to remember is that a lot of things in life are not instant gratification. Most people want instant gratification, we want to see results immediately, but that is not the case. Think of it as a seed you plant in the dirt. The second you put in the dirt, a flower doesn’t popout, or a tree doesn’t grow 20 feet. It takes time. Everything in life is delayed gratification. You will get results at some future date and time and it is hard for many people to understand this or relate to it.
As I mentioned earlier we get bombarded the choices all the time. So the choices that you make, you have to know and understand that by doing the good, humble, appropriate, well thought out, well planned, properly positioned things throughout your life you will start seeing results on a continuous basis. If you are always looking for instant gratification life will disappoint you.
I hope you found this article helpful in understanding opportunity cost. Know that opportunity cost comes up everywhere in life not only in business but and friends, family, things we do, people we hate, people we love, it is everywhere! I’m curious about your opportunity cost that you had to encounter that were a little bit tough or hard to deal with when you saw the end result.
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