Opportunity cost

What you give up by choosing one use of your money, or time, over the next-best alternative.

Example

Keeping $10,000 in a non-interest checking account has an opportunity cost equal to whatever it could have earned invested elsewhere.

Important

Doing nothing is also a decision with a cost - it is just an easy one to miss, because nothing visibly happens.

Related terms

• Investing — Committing money today with the expectation of more money later, in exchange for taking on risk and giving up the ability to spend that money now.
• Capital — Money set aside to be put to work, as opposed to money earmarked for near-term spending.

Lessons that explain it

• The spread between the policy rate and what you are offered — There is no market price here. The price is the gap between what the central bank sets and what the institution passes on - and that gap widens and narrows in a pattern that is not symmetric. (11 min)
• Certainty on a date, and the ability to act — Cash does two jobs no other holding can do: it will be there in full on a known date, and it lets you act without having to sell something first. It pays for both by losing purchasing power, reliably. (8 min)
• How many do you have to see to make one investment? — Put real numbers on your funnel and two things become obvious: how fast a first look has to be, and how much sourcing you actually need to support the portfolio you are trying to build. (12 min)
• When to walk away, after you have already spent — By the time walking away is the right answer, you have usually spent money, months and a quantity of public commitment - and all three argue in the same wrong direction. (12 min)
• Would you invest in this round if you had never met the company? — A follow-on decision should be judged as a new investment at today's price and today's evidence. What you already invested is gone either way and should not decide what you do next. (9 min)
• For most people, their future earnings are the largest asset they own — Human capital - the value of your ability to earn - is usually worth far more than a young person's savings. Education, skills and health are ways of investing in it, with real costs and uncertain returns. (9 min)

All 578 terms in the Investing glossary