The Center for Financial Empowerment, the nonprofit organization founded by SCE Credit Union, empowers high school youth and young adults by teaching real-life financial lessons through activities and classroom workshops. One of the most basic workshop topics is about making choices with money.
Making healthy financial choices involves understanding the difference between needs and wants, as well as the concept of opportunity costs. While it may be important foundational knowledge for teens, everyone can benefit from a reminder of the basics from time to time.
There are many ways to satisfy our needs and wants. But, none of us has suﬃcient income or time to buy and do all of the things we might enjoy in a day, a month or a lifetime. As a result, spending decisions inevitably involve trade‐oﬀs. We make choices. With each choice there’s a trade‐oﬀ because in choosing one thing, we give up another. The opportunity cost of a decision is the value of the next best alternative that must be forgone as a result of the decision.
Opportunity cost is one of the most powerful concepts in learning to manage your money. Opportunity cost is unique to individuals and based on a person’s own values and goals. When you recognize that spending more on designer clothes leaves less of your money available for rent on an apartment, or gas for your car, you’re ready to make informed choices based upon what’s most important to you.
Not thinking about opportunity cost can have significant effects on the future. How much wealth are you giving up by taking on that extra car payment instead of investing those dollars? How much more could you add to your retirement income if you weren’t carrying credit card debt? It’s a good practice to question your opportunity costs now and then. You may find your financial choices can benefit from a tune-up.