"While you can have virtually anything you want, you can’t have everything you want." - Ray Dalio
We all have limited time and resources.
Every decision comes with a price tag—if not in money, then in time and energy. And whenever you say "yes" to one thing, you're saying "no" to a bunch of others.
This is why it's important to understand opportunity cost, as it'll empower you to make wiser decisions among all your options.
Understanding this concept is the key to making wise decisions and maximizing your time.
What is Opportunity Cost?
Warren Buffett is widely considered one of the most successful investors alive. And he believes that the most important factor when making an investment is not the return on investment, but the opportunity cost.
In the world of investing, opportunity cost is the amount of money you might not earn by choosing one asset over another. It considers the financial trade-offs of NOT allocating your capital elsewhere.
But opportunity cost isn't just about money. It can also apply to investing your time and energy.
For example, if you spend an hour watching TV, you can't spend that same hour working on your business. And this decision can have long-term costs that will impact your future business success (especially if this is a recurring decision you make).
In his book Opportunity, entrepreneur Eben Pagan explains the significance of opportunity cost:
"Opportunity cost assumes that there are several other opportunities that are available, where we could invest the same time, energy, effort, attention, and other resources... and that we need to consider what the potential outcome would be for those opportunities as our most important consideration."
The bottom line is that every decision carries an opportunity cost. And if you want to maximize your time and make great decisions, you'll want to weigh all the opportunities that are available to you.
Don't Let Big Opportunities Pass You By
At the root of opportunity cost lies your ability to be proactive.
What happens if you aren't taking charge of your available opportunities and proactively choosing the right ones? Someone else will be making decisions for you.
On the surface, this may appear to be an easier or simpler approach to life. But it's a very disempowering state to live in (especially if others don't have the best intentions). And ultimately, you'll let big opportunities pass you by.
"If you don't design your own life plan, chances are you'll fall into someone else's plan. And guess what they have planned for you? Not much." - Jim Rohn
If you aren't consciously choosing the right opportunities, then someone else will do it for you.
Take control of your time by weighing the opportunity costs of your actions, then choose the most empowering decisions.
How to Use Opportunity Cost to Your Advantage
Now that you know what opportunity cost is and why it's important, let's look at how you can use it to your advantage.
Here are three tips for evaluating opportunity costs in your day-to-day life.
1. Ask Yourself, "What Else?"
Whenever you're faced with a decision, ask yourself, "What else?"
Write it on a sticky note. Set an alarm to remind yourself. Create a screensaver for your computer or phone. Always consider other opportunities you're giving up by making a decision.
This will train your mind to generate alternative options and solutions to any given situation:
- If you're gossiping or complaining, what else could you be doing with your emotional capital?
- If you're binging the newest Netflix show, what else could you be doing with your time?
- If you're about to eat junk food, what else could you put into your body?
By doing this, you'll be able to start comparing the opportunity cost of each decision and make wiser choices.
2. Determine Your Criteria for Evaluating Opportunities
To make the best use of your time, you need to set criteria for evaluating opportunities. This will help you quickly identify which opportunities are worth pursuing, and which ones aren't.
This ultimately boils down to what matters most to you, so be sure to identify your values and goals. For instance, let's say you want to improve your physical well-being. Now, when you're given the option to eat junk food or healthy food, the decision is much easier to make.
But if you're stuck, use a guiding question that entrepreneur Eben Pagan uses to evaluate an opportunity:
"Will pursuing this opportunity grow me as a person, build valuable relationships, and teach me skills that will become more and more useful in my future?"
Determine what's valuable to you. Then choose the opportunity that aligns with it.
3. Develop a Patient and Abundant Mindset
We're bombarded with choices and opportunities. And it's tempting to pursue them all.
Of course, we all know this isn't realistic. Your decision-making capacity is limited, which is why it's important to evaluate if an opportunity is the best use of your time, energy, and resources.
And if you're impatient, you may choose sub-par opportunities that don't serve your goals. Or worse, you could become desperate and choose every opportunity that comes your way.
Don't choose an opportunity just because it's available. Only pursue an opportunity if it serves your larger goals.
Develop a patient and abundant mindset.
This mentality will remind you to not get attached to any given opportunity. Pursue it IF it'll improve your life. But remember, many more opportunities will come your way.
Impatience and desperation will lead to poor decisions.
By understanding and evaluating opportunity costs, you can make better decisions and get the most out of your time, energy, and resources.
Want to learn more about how to maximize your time? Check out our article: The #1 Indicator That You’re Maximizing Your Time and Effort.