What Is Opportunity Cost? How To Use It To Boost Side Gig Earnings
The one that got away can refer to more than just romantic endeavors. In fact, it can often be part of the bigger capital structure of your business or personal finances. Hemming and hawing over investment or business decisions shouldn’t be a permanent state, however, if you consider all of your options it will only help you choose the better financial path.
Read: What To Do if You Owe Back Taxes to the IRS
What Is Opportunity Cost?
Essentially, opportunity cost is the potential benefits or gains an investor, consumer or business misses out on when one alternative is chosen over another. Here are some key takeaways:
- You cannot calculate opportunity costs to an exact number so it should just be used as an internal measure. However, factoring them in can help you make more economically profitable business decisions.
- Proper evaluation of explicit and implicit costs refers to weighing the benefits of the chosen option against all others.
- Regarding the stock market, the concept of 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.
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:
- 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.
- 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.
- 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 a period of 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.
- Choosing to take public transportation over driving a car it may be cheaper, but the opportunity cost could include your comfort or the time it takes to get places.
Final Take To GO
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 also fewer regrets as you know you thought all of your choices through.
FAQ
Here are some answers to frequently asked questions about opportunity cost and maximizing your earning potential.
- What is opportunity cost and what are some examples?
- Opportunity cost is the potential benefits or gains an investor, consumer or business misses out on when one alternative is chosen over another. This might mean spending time at home versus heading out for the evening, choosing to to invest versus putting your money in a savings account, or choosing not to drive, thereby saving on gas and wear-and-tear on a vehicle, but missing out on the convenience.
- Which best describes an opportunity cost?
- The best way to describe an opportunity cost is the potential benefits or gains an investor, consumer or business misses out on when one alternative is chosen over another as well as considering the value of the resource in its next best use or next highest-valued alternative.
- What are five opportunity costs?
- Opportunity costs ultimately means choosing one option over another, with the ultimate choice being the one that is most valuable. This might mean spending time at home versus heading out for the evening, choosing to When you choose to work overtime instead of spending time with your family. The opportunity cost is the time lost with your family which you cannot get back.
- 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.
- 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.
- 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 a period of time.
- Choosing to take 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.
