Invisible cost

0.00 avg. rating (0% score) - 0 votes

When you translate the choice principle to finance, you can also understand that your financial position is the outcome of all the choices you have made so far. For example, you may have decided sometime last year to buy an expensive new phone, even though your previous phone was still in excellent condition. You had a lot of other options for how to use these funds, but you decided to get a better phone. One of the alternative options would be to put part of the funds on a deposit for a year, increasing your savings and additionally earning an interest. You would be richer today using your old phone.

To put money on an interest-bearing deposit was an opportunity that you have forgone. This action created a cost for you, this cost is the difference between what you have now, which you bought with the money (a phone, which is worth less than you paid for) and what you would have if you chose the investment option (same amount plus interest). The cost of forgone opportunity is called Opportunity Cost, and each decision in your life has this embedded in it.