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Getting to college is something, you have expectations and you are euphoric about what college will bring you.
Well, that’s how I was.
When I was in college, I was enrolled in the business program.
It was a big step-up for me because I had passed high school with mostly C’s.
I knew I was going to have to be more serious about my studies if I was to graduate from college.
And obviously, that’s what I did, since I have my diploma.
In the business program, you learn a lot of things like example accounting, finance, marketing, microeconomics, macroeconomics, etc.
I learned interesting concepts in all of those courses, but somehow I can’t explain why there is a concept that struck me more than the others, and it’s opportunity cost.
As you will see it’s a really interesting concept that applies to everything you do in life.
This concept says that there is a cost to every decision you make.
You choose one thing over the other and there is a cost to the thing that was forgone, that loss is called an opportunity cost.
You have to see all the decisions you make as a whole.
To begin with, there are two costs that must be added to have the opportunity cost. The explicit cost and the implicit cost.
Whenever there is money involved, that is, an outflow of money (expense), it is considered an explicit cost.
On the other hand, the implied cost is everything you give up for the other alternative which is not money.
This concept struck me probably because we have a tendency to see the explicit cost to decisions we make but we do not notice that there is another cost to the decisions we make.
It was interesting for me to think about the different costs involved in a decision.
Let me give you an example
Since we are in the subject of education, let’s take the example of me having the choice of taking a class in the summer at University.
Right out of the bat we can say that the tuition fee is an explicit cost. But there could also books, bus passes or gasoline for the car, etc…,
Some of the implicit cost would be if, for example, I would have taken my car to attend class, the depreciation (the wear).
Also if I hadn’t taken the course I could have worked, so all the money not earned is also a cost, or I would have been able to rest, spend time with my family, etc…
How it applies to your every day decisions
In the book The Millionaire Mind there is the example of choosing to hire a plumber or do the job yourself.
I like this example because it shows that sometimes factors involved in a decision are overlooked.
Here is an example:
The author says that saving 150$ for doing a job yourself is not the only thing to consider. There is a lot of other stuff to consider besides the money outlay.
One of the things is that the plumber with his better knowledge he can choose more suitable materials. And this could make you money in terms of operating costs.
Moreover, he provides a warranty on the installation. As a beginner, you might make mistakes and end up having more problems in the long run.
Time is another factor. They’re not only the time that you spend for the installation but also the time you spend shopping for the unit, to study the installation techniques and acquire proper tools.
As he says “Why study plumbing if you’re not going to be a plumber?”.
Your time could be spent working, or achieving a personal project you might have, to enhance your professional skills, study investments, or spend time with your kids.
I hope this article will save you from forgetting some important factors in your decision making.