Opportunity Cost: What It Means and How To Use It Wisely

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Once you understand opportunity cost, you’ll make smarter financial decisions, especially when you’re managing side gigs or investing your effort, time and money. Here’s what you should know, so you can choose the right financial path.

Opportunity Cost Definition

Opportunity cost is the potential benefits or profits you may miss out on by choosing one option over another.

Important Points About Opportunity Cost

By choosing one opportunity, there’s a chance you could miss out on the gains of the other choice. Whether you’re an investor, are owner or part of a business, or simply a consumer, there’s always a result when you make a choice.

Here are some key takeaways: 

• You can’t calculate opportunity costs to an exact number, so it should just be used as an internal measure.
• Your business decisions may be more profitable when you factor these in.
• Weigh the benefits of your choice against all others by looking at both explicit and implicit costs.
• When it comes to stocks, opportunity cost compares the expected return on investment in one stock or another.
• Think of marginal opportunity costs as forgone benefits or a sunk cost of time or money compared to what you could have gained from an alternative investment. 

How Opportunity Cost Affects Your Side Gig 

Your time spent or opportunity to earn are important variables when determining how much money you can make. As economic theories go, this one can feel a bit existential and harder to calculate. To help, here’s a loose formula.

Formula for Calculating Opportunity Cost

Opportunity Cost=FO-CO

• FO = Return on best-forgone option
• CO = Return on the chosen option

To maximize your side gig earning potential, you should use this formula when choosing one over another. See where you can save and then assess your risk tolerance so you can make the right investment decision for you. There isn’t always necessarily a right or wrong answer, but there usually is one that fits your financial situation best.

✅ Compare expected earnings per hour.

✅ Factor in travel or prep time.

✅ Consider your client’s needs.

✅ Determine how reliable your platform is in terms of earnings and gig availability.

✅ Think about long-term relationship potential.

​Opportunity Cost Examples

Opportunity cost can also be considered as the value of the resource in its next best use or next highest-valued alternative. Here are some examples to help better understand opportunity cost:

Financial Examples

A Gap Year

If you take a gap year before college to work and make money, you are potentially giving up on an education that would allow you to earn more money in the future.

Alternatively, if you use that gap year to travel instead of work, you are missing out on money you could put toward your tuition. Either way, you are giving up one choice to achieve another.

A High-Yield Savings Account

Opting to keep your money in a high-yield savings account rather than invest that money in the stock market comes with the opportunity cost of losing out on profits shared by the company and increasing share value over time.

Conversely, if you invested in the stock market instead of putting your funds in savings, the opportunity cost is losing the potential interest earned on the account.

Time Management Examples

Going Out

If you spend time and money going to a concert, you cannot spend that time at home catching up on chores, and you can’t spend the money on other resources.

Driving a Car vs. Not

Taking public transportation over driving a car may be cheaper, but the opportunity cost could include your comfort or the time it takes to get places.

Final Take 

There will always be several paths you can take when it comes to making decisions in life, especially financial ones. When it comes to maximizing your side gig or earning potential in general, make sure to weigh the value of all of your options before landing on one.

Not only does evaluating your opportunity cost lead to better decision-making, but it also means fewer regrets since you’ve thought through all of your choices. 

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