Not that I want to toot my own horn or anything but I got an A in my econ course last semester. This makes me the Master of Economics and, as such, I will write today about opportunity cost.
Opportunity cost is a concept that econ majors learn in first semester and generally struggle with for the next three years. Basically, if you want to spend your money on X, you have to calculate, not only the cost of X but also, the cost of what you are “losing out on” by spending your money on X.
For example, if I have a chance to go to the beach on the same day that my neighbour asks me to babysit her screaming child, I will have to calculate not only the cost of getting to the beach (lunch cost, kayak rental etc. but let’s say $50) but also, the amount of money that I forewent by not babysitting (let’s say 20$). If I value a day at the beach more than I value $50+$20 then I will go to the beach. If I don’t consider a day at the beach to be worth $50+$20 then I will stay home.
Most people would only calculate the cost of going to the beach, or the foregone cost of not babysitting. In economics talk, this is irrational — you can’t go to the beach without not babysitting.
I personally, used to never take a vacation. At my old job, if I didn’t want to take vacation, I was allowed to work straight through the year and collect a paycheque for all 52 weeks and then an extra 3 weeks of pay in June. Life was sweet and I hadn’t ever traveled anywhere before so I didn’t know how much I enjoyed it (aka, you can’t miss something if you’ve never had it).
Eventually, I started taking mini-breaks and full-fledged vacations every chance I got. Holiday from school? Cuba! Christmas break? Europe! I lost sight of the opportunity cost of each trip and I am realizing now, this is why I have been feeling so depressed about my finances lately.
Let me explain. My trip to Europe cost me about $2000. What I didn’t factor in was the fact that, during those two weeks, my company offers 16h shifts 4 days a week and 8h shifts 2 other days of the week. In the two weeks I was gone, including holiday pay, I would have earned over $3 000. I actually earned about 100$. This brings my total trip cost up to almost $5 000 — a number that I am disgusted with and absolutely do not feel was what my trip was worth.
So, next time you decide to buy something new or take a trip, please, remember this econ lesson and calculate the opportunity cost of that purchase — it might be more than you are willing to pay