The Opportunity Cost
Last weekend while I was attending a marriage ceremony of my cousin, I met with many cousins of mine whom I had not seen from quite a long.
As I am the eldest child of my family, and my parents are the eldest child from their respective families too, most of my cousins are younger to me. I had well-engaged discussion with few of them about their life and their future aspirations. But as I have this bad habit of discussing personal finance, after few minutes of discussion usually discussion gets drifted towards my favorite topic, that is The Personal Finance. As I did with my one of the cousin in my last post. :)
Most of my cousins are well settled in their respective field, I feel proud when I hear their success stories. But as we drift towards personal finance I get the feeling of how much busy they pretend themselves in their life and ignore the fact for which they are going to the job, Money. They are earning well, and probably saving well too, but they are not investing well. This comparison of Earning vs Saving vs Investing is a separate topic in itself and I will explore it in a future post. But what I want to discuss in this post is how they are dealing their hard earned money.
As I said, my cousins earn well but they struggle with investing part. They are stuck with so many choices and their lack of understanding because of which they start to ignore Money part. They keep on accumulating it in their bank account. But one thing they do not understand is “Not making any investment decision is in itself is a decision, which is the default decision”. They leave their hard earned money in their bank, of course, in case and just in case, if they are little less busy then they create a fixed or recurring deposit to earn a little extra. But I hate to tell them, this is their default decision but certainly not the best decision they can make. That’s where Cost of Opportunity plays role, which they need to learn.
- What is Cost of Opportunity?
Investopedia has a great article and a video on Opportunity Cost, so before I repeat it have look at it. In nutshell, Opportunity Cost is the value of our default choice. Assuming my cousins are keeping money in their bank accounts their Opportunity Cost is 4 percentages. I believe, their Opportunity Cost is not too high but they are afraid of the wrong choice and end up losing money. I believe, all they need to do is build good knowledge about personal finance and start embarrassing choices. There are plenty of sources to learn from, include the one you are reading right now. :) There are plenty of other avenues where their money could earn better returns. I understand, market linked choices carry risk but they are younger and can digest such volatility very well.
Take a plunge and start treating your money as a tool, which you need right now and you will need in future too. It’s better choice to gift your future-self a little more money by taking risk within one’s capacity to digest at younger age.
Originally published at The Simple Personal Finance.