Economics 101: Opportunity Cost with Dan Egan
- Written by Candice Elliott
Because the state of personal finance education in our schools is appalling, we decided to do some Econ 101 episodes. Today learn about opportunity costs.
Dan Egan from Betterment will be our professor today and he’s drinking beer brewed at Betterment!
Opportunity cost means, what if instead of doing Thing A you did Thing B. You plan to go out with your friends. You know you will spend about $200. What if you go and meet the person of your dreams? What if you get mugged? What if you stayed home and invested the $200?
The number of opportunity costs is almost limitless, a game you could play for hours if you liked really boring games. This can be paralyzing and you don’t need to think so deeply about it. You just have to consider opportunity costs in four areas:
Money. What else could you do with this money?
Time. What else could you do with this time?
Effort. Where else could you spend this effort?
Asking. There is almost always zero opportunity cost in asking someone something. So man up and ask the cute girl out! Ask someone to hook you up with a job. The cost is usually only to your ego and they bounce back faster than you think. The same goes for asking for help. No cost to you and potentially great benefits.
This ties into investing because your investment options are almost limitless. But finding the investment with the lowest fees should always be one of the top determining factors when choosing.
Option value is just keeping your options open. We tend to give this up too early. It’s a valuable thing and you only want to commit at the last moment. This advice does not apply to relationships.
We hope this little Econ lesson, chock full of real world examples helped fill in the gaps left by our crummy educational system.
River Horse Belgian Freeze: A dark Belgian ale.
Betterment: Invest here and get up to six months free investing.
Flying Fish Red Fish: A West Coast style hoppy ale.