- What is an opportunity cost?
Opportunity costs are the benefits and losses you get from choosing a certain path. We have all had this moment in life when we had to choose between two or more paths. The hardest decisions are the ones where all of them give you the best benefits.
Let me state an example:
Let’s say you have $100. You have enough money to start a small company. You could either make a street-side restaurant in a public market or you could make a lemonade stand near a workout place. Both have their own money-making strategies but you decide to go with the lemonade stand as there will be more competition in the public market. So now you have not only lost your $100 but you have lost the other opportunity. This doesn’t mean that your decision is bad, rather it means you have to leave certain things
- What are the types of opportunity costs?
Expense
Expense is when you spend money and you get nothing from it or lose anything. An example would be taking extra time to sleep. If you decide to sleep for a few extra hours, you will miss the opportunity of doing something better at that time. Like for example: Studying.
So then you gain less and lose less. Even though expense would mean you would lose more, it’s more of something that would do basically nothing.
- Asset Building
Asset building is the best type of Opportunity Cost. WHY?
Because this is something that gives you a gain, not a loss. Sometimes it can even make you go from rags to riches. In the same way, ants save up for the winter, Asset Building will build up your future.
It doesn’t have to be houses, stocks, or businesses. It can also be your health, your money, and your time.
You build up your health by working out and eating healthy foods. You build up your money through investments and working hard. You build up time by saving every second of it.
- Debt
This is the worst form of Opportunity Cost. The reason is that instead of gaining, you lose. You take from your future. And if you keep taking your left with none.
The problem with debts is the fact that each debt will lead you into another debt. It’s like a family tree of debts. For example, You haven’t done your work. It’s late evening and you are very sleepy. So what can you do? Either catch some z’s or go and do some tough grind.
Let’s say you doze off. Which means that you will have to do your work somehow? So you do it the next day. But then you fail to do your day’s work. So you decide to stay up late and do your work. But then you are very sleepy and so you do your next day’s work sloppily.
A doom loop.