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Spending - Head Matters


5.  Opportunity Cost 

A person’s income represents his or her scarce resources. Because resources are scarce, every decision involves an opportunity cost. The opportunity cost  is what you give up to have something. The opportunity cost is the most valued option that you refused because you chose something else. The opportunity cost is your next best option. For example, let’s say that you decide to buy a cell phone with unlimited text messages but it costs $10 more a month. By making that decision, you have given up $10 a month that you could have spent elsewhere such as buying a movie ticket. That is the opportunity cost of buying the unlimited text plan.

One important choice everyone faces is whether to consume goods and services today or to consume goods and services later. Spending today brings immediate benefits or gratification. The opportunity cost is that you will have less money to buy goods and services in the future. Saving builds wealth to buy goods and services such as a car, house, or vacation in the future. The opportunity cost is not buying as many goods and services today.

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