What is opportunity cost?

Opportunity cost is when you put your resources into one thing, at the cost of putting it into something else. When considering financial opportunity cost, this can equate to money or time.

Say for example you purchase a holiday home over a property purchased purely for investment. In this case the opportunity of having a house you and your family can use may be at the cost of a lower investment outcome. Possibly lower rent, because you are using it or lower capital growth, because it has more cyclical demand.

Opportunity cost can be measured and it is good to review your investment portfolio through this lens. Say you are overweight in property. How did the property market or more specifically your property do against the share market? If the share market outperformed for the period, your overweight bias to property came at the opportunity cost of having diversified into the share market.

Your time has a financial value linked to it also and it is good to consider the decisions you make through the lens of opportunity cost. For example, when weighing up your career choices, choosing to take one job that has a lower income than another has a financial opportunity cost linked to it that should be considered as part of your financial decision making and in turn financial plan.

An opportunity cost is not a reason in itself to choose an outcome that is likely to yield a lower financial outcome, however it is always something you would preferably be aware of and have made a conscious decision about with foresight. It is always good to measure the opportunity cost in hindsight to help with what you decide from that point on too.

Speak to one of our degree qualified advisers about how this relates to you.

Click here to return to the FAQ topics.

 

GENERAL DISCLAIMER:

The content of this presentation is intended to be general information only and has been prepared without taking into account any person’s objectives, financial situation or needs. Each person should consider its appropriateness having regard to these matters or obtain relevant professional financial advice before making any financial decisions.  Examples are illustrative only. Each person should obtain any relevant professional financial, taxation and social security advice before making any financial decisions.