Opportunity cost
Opportunity cost is the value of the best alternative you give up when you make a choice. The real cost of anything is what you could have had instead.
It includes costs that never show up as money, like time. The opportunity cost of a year at college includes the wages you could have earned working.
In investing, cash sitting idle has an opportunity cost: the return it could have earned.
Example
If you spend $1,000 on a phone instead of an index fund returning 7%, the opportunity cost after a year is the $1,070 you'd have had.
In Journey Shares
Uninvested cash in the game slowly loses value to inflation, which makes its opportunity cost visible.
Related terms
- Sunk cost: A sunk cost is money or effort already spent that can't be recovered.
- Comparative advantage: Comparative advantage is the ability to produce something at a lower opportunity cost than someone else.
- Inflation: Inflation is the rate at which prices across the economy rise over time, so each dollar buys less.
Guides
Practise with $10,000 in play money
Free. No real money involved.
For learning only. This isn't financial advice.