Understanding Trade and Opportunity Cost – Every Dollar Counts

There will always be things to buy. There will always be money to be spent. The world doesn’t stop moving when you’re sleeping. Money continues to flow in and out of people’s hands 24/7—it’s just how things work. Understand, there is no shortage of people happy to take your money, because exchanging a product for your money means a meal for their family and income for their household.

However, the goal is to ensure you understand the trade off and opportunity cost here. That is, are you willing to spend X amount on an item or product, knowing your household will have less cash as a result?

For example, if I go down to the local donut shop for a maple bar that costs $3, I ask myself in that moment: is that $3 worth the enjoyment of the donut? The same $3 could be invested and grow into further purchasing power for my household instead of their household benefiting from the future accumulation.

Sometimes the answer is yes, and I don’t think twice about it, but often I find myself reconsidering and instead investing the $3 because I know that, in a couple of years, it could buy me two donuts instead of one. Not only that, but my household will continue to benefit from the compounding nature of the $3 invested, rather than the one-time enjoyment of the donut and exchange of future wealth.

At some point, spending money isn’t about what you can’t do but about what you can do. When you’re lifting yourself out of poverty, it feels great to buy your favorite donut here and there because you can finally afford it. But as your life becomes more stable, it’s about knowing what else can be done with your money and applying opportunity cost analysis here and understanding the underlying trade off.

Remember, a single dollar spent isn’t just a single dollar spent—it’s all the pennies, nickels, and dimes that could have accumulated from it if it had been invested. In the world of investing, opportunity cost often refers to whether one investment offers better returns for the same amount of capital invested