We dreamed of a long honeymoon in Australia. We requested leave of absences from work. We were excited. We wanted to go. But then, we did an opportunity cost analysis. And we completely changed our minds.
In economic terms, opportunity cost basically means you can’t rule out the costs and benefits of alternate choices; you must calculate those into your decision making process. Here is a simple example:
If you choose not to go into work tomorrow, you must take into account the money you would have earned if you did go into work. You wouldn’t simply have a day off, your opportunity cost would be a day off and minus $X dollars for the money you missed out on making.
The True Cost
When we sat down to discuss the finances of Australia, we came up with two different totals. Our first total was purely based on travel expenses. That rough total came to around $8000 for both of us. Then we calculated opportunity cost…
There were 3 areas where we factored in opportunity cost: Income because we would be losing out on earning money through the leave of absence; Rent because we would have to pay rent regardless while we were away; and Bills because there would be bills such as electricity and internet that would still be deducted regardless while we were away.
1) Income – $2500
2) Rent – $1175
3) Bills – $70
Total – $3745
Therefore, we had to factor in $3745 into our initial travel estimate of $8000. So the true cost of the vacation ballooned from an already disheartening $8000 to a terribly depressing $11,745.
Knowing When to Say No
$11,745 was a stomach churning amount. While monetary factors played a big role, there were other reasons that affected our decision making process.
First, we noticed our excitement for Australia faded as it got closer and closer to the departure date. It’s not that we don’t like traveling. It’s quite the opposite. But we had already gone on a few smaller trips throughout the year and we didn’t have the hunger to tackle a big adventure.
Second, we realized we didn’t have completely thought out reasons for going to Australia. Yes we would love to go see Australia one day, but we couldn’t come up with concrete reasons why we wanted to go. The more we dwelled on this, the more we realized it just wasn’t time to go. Yet.
Those reasons, along with the immense cost, factored into our decision to postpone Australia for another time in the future.
Do you factor in opportunity cost to aspects of your life? Is it a valid concept to apply to real life?