Understanding opportunity costs of time and money

Opportunity cost is an economic term in it's common form. You can also apply it to daily life, spending, and many other areas. It is good to think in terms of opportunity costs if you have trouble with buying too much stuff. It is also good to use it for managing your time.


You want to spend $100 on some new electronic gadget you have been eying for a while. You see it at a store and you are tempted to buy it. Now is the time to consider opportunity costs. Think to yourself: What else could I do with this $100? You could put it into savings for other goals such as a vacation, a replacement car, down payment for a new home. Would you rather have this gadget now or attain these other goals sooner? If you spend the $100 now you give up the opportunity to use that money on other things that may be more important.

I use the above example myself all the time. I work in the IT Industry and I like computers and all the toys that I can get to go with them. I used to buy new stuff all the time but have cut way back by going through this thought process. I have a strong passion for travel and tell myself I can either have this now or save the money and cover 3 days expenses in Thailand, etc.

You can also use this to help manage your time. Here is an example:

You have free time this weekend and a friend offers to sell you his extra ticket to a ball game. You are considering it as you would like to go to the game. You also have to weigh other things in your life to decide if it is worth your time. Maybe you have a household project you need to get to. Or you would like to spend more time with your family. You may want to finish that book that has been collecting dust for a month. You have to decide what is the best way to use this free time. There is no right or wrong answer here only you can decide how to best spend your time.

It is important to remember that your time is just as (if not more) important than money. How we spend our time affects our happiness and what we get out of life. Money helps us to do the things that we enjoy in our lives. For me this is travel and living without a job (eventually). Always remember that we work to live. We do not live to work.