Submitted by admin on Mon, 07/07/2014 - 13:37
One of the most valuable lessons I ever learned came from a University economics course; since then, Opportunity Cost has turned out to be the driving force behind all my spending decisions and is at the heart of the Life By The Pie™ philosophy. Your Opportunity Cost is the cost of choice, the trade-off between choosing one thing over another. Specifically, your Opportunity Cost is identified as your next best option.
We actually have quite a lot of choice in our lives, the problem is most of those choices aren't very viable or desirable. You could, for example choose not to...
pay your mortgage; you would then, of course lose your house so this wouldn't be a very good option. The trick is to be able to identify what your options are and to develop some level of understanding of how those options will benefit you in order to make "good choices". What we will call "good choices" are ones that add to the benefit of your life without causing harm, now or later. You could choose to spend all of your money on lavish trips and entertainment, but when you can't afford any kind of a retirement and all you're left with are memories; that too may not be a "good choice".
The best place to start is to organize your expenses in order of most fixed to most variable. If you use the Life By The Pie™ system, you will notice that we've already arranged your expenses with this in mind. Understand that even your fixed expenses aren't truly fixed, and some of your variable expenses are more fixed than you might give them credit for. Take your mortgage for example; reducing your mortgage payments by negotiating a better rate or even by downsizing your home are very real options. Alternatively, your morning coffee may be something that helps you get through your day and your quality of life may suffer if you tried to eliminate it all together. Again, it comes down to choice. If you valued travel more than having a large or well appointed house, you could viably reduce your housing expenses to free up more money for travel. Remember; a dollar spent is a dollar that cannot be spent on anything else.
Our Future Pie feature was designed to allow you to see the impact of these choices over a long term period, so you can easily identify the cost of these opportunities and make better choices concerning the quality of your life. Don't stress about trying to make the absolute right choices, just try to make good choices and fulfillment will follow.