This school year I have the privilege of teaching seniors, in high school, Economics. One of the basic concepts is opportunity cost, and this is tough to teach a 17-18 year olds that it even exists in their lives. So, my example in class was one that most could relate to. I told them to picture they got a great job at Best Buy and saved $2,000 for a dented but solid used car. I asked them about the opportunity cost of buying the car. I got answers like and empty bank account, lost activities with friends, or lost potential investment money. Then I explained that underneath that purchase there were long term opportunity costs that existed as long as they owned their car. One kid shouts out, “Oh man, Insurance and gas!” He paid his own insurance and gas and was a minority in the class in his being responsible for paying his own way. Most kids parents paid this for them. So we explained that insurance for him was high at $300-$500 a month and he claimed that gas was about $100 a month too for him. This $2,000 car was costing the driver, maybe $7,000 a year to drive around town in gas and insurance alone. Kids were shocked! But, it goes deeper…One students yells out, “Oh crap, the car sucks and breaks down!” I said maybe, but lets talk about new tires, oil changes, window washer fluid, and basic maintenance to keep you from breaking down. That can be another $1,000 a year, and if it breaks down it could be $500- $2,000. I explained if the repair bill is more than the value of the car get rid of the car. So, the $2,000 car will cost the driver $8,000-$10,000 a year in extended opportunity costs every year, and you will loose out on other opportunities as you work to pay for the car’s expenses.
I know this is a teenage example and I used high numbers in some areas, and I wanted to shock them a little bit, but I got a conversation going in the classroom that turned into other areas of their lives that cost them time, money, energy, resources, and lots of other things. I heard them talk about mortgages, rent, their swimming pools and the chemicals, eating out with friends, dating, apps on their phones, and clothing. They went into a full analysis of their simple 17-18 year old lives and assessed all the opportunities they have gained, or lost from their decisions, or family’s decisions. I challenged them for the weekend to go home and talk with their parents about how their parents decide on which opportunities to pursue and which to forget about for their family.
I shared an example I had with my son. As we where taking our washing machine apart following a YouTube video to fix it once again, He asked, “Why don’t we just buy a new washing machine?” I explained that a new one cost $800, and to fix this cost us $5 and and an hour of our free time. He said but it would be new and we wouldn’t need to waste time fixing it for a long time. So, I explained that we live on a fixed budgeted income. We do have a fund for a new washer for one day, but it is not fully funded yet. We could use the money from some other budgeted category to buy a new washer today, but then we wouldn’t be able to do that activity or afford that stuff it was budgeted for. He said we should do that and just forget something else. So, I said you can’t play any sports for the next 6 months then. He said, ‘WHY!” Because his sports is budgeted for $800 for the next few months, and that if he would sacrifice playing sports we could get a new washer today. He looked shocked, but said that he could give up sports if we needed it. Shocked, I said, “NO, you can play sports. We would pull the money from someplace else.” I was shocked that he would willingly give up his sports so quickly for the family washing machine, but I like to believe he weighed his options and decided that the most good would come from the new washing machine and his opportunity cost would be him playing sports. I also hoped that me giving up extra hours at work, and choosing a family friendly career was working out for my opportunity costs in my child turning out so kind and thoughtful. It was a proud Dad moment.
So, opportunity costs are all around us, in every decision we make. They are short term like where do you want to get some ice cream or long term like a mortgage and the interest rate. So if you are feeling broke, pressured, feeling the monkey on your back weighing down hard, then you might look closer at your choices and see how you have gotten where you are today. Make some notes and make some changes to help your opportunities improve your situation in life. Remember there is no such thing as free in life. Everything you do means losing out on something else. Make your choices wisely thinking of the long term effects.