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The opportunity cost of Valentine
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As a recap, we said that interest rates represent the cost of money. Like everything else, money has a price.
The forces of demand and supply influence interest rates. When consumer savings and investing increase the supply of money, interest rates will tend to decrease or drop. However, as consumer, business, government, and foreign borrowing increase the demand for money, interest rates tend to rise. But for the sake of emphasis, interest rates affect your personal financial planning.
For instance, the earnings you receive as a saver or an investor reflects current interest rates as well as risk factor based on such factors as the length of time your funds will be used by others, expected inflation and the extent of uncertainty about getting your money back.
Today, we will see the impact of opportunity costs in our personal financial planning process. In a couple of days we shall be celebrating the Valentine day. Though with some religious connotation, the day has over the years been turned to lovers’ day a day when lovers commit all sought of atrocities in the name of Valentine. But beyond the celebrations how would the valentine affect your personal finances? Did you budget for it or are you just spending for the fun of it? Is that bash necessary in view of competing demands for meagre resources? This brings us to the day’s topic The opportunity cost of valentine
Economics students would always tell you that opportunity cost simply means alternative forgone. What are you sacrificing for you to have a bash for valentine? In other words, what would be the cost of your valentine this year?
Are you sacrificing that investment in a bank’s public offering for a valentine bash? Have you been able to meet up with all your necessities or needs as postulated by the great psychologists Maslow? We are living in a world full of competing demands and the choices we make determine what our future will be.
But beyond that, have you noticed that you always give up something when you make such choices. In every financial decision you sacrifice something to obtain something else that you consider more desirable.
For example you might forgo current buying in order to invest funds for future purchases, or long term financial security or you might gain the use of an expensive item now by making credit payments from future earnings. Both purchasing and investing represent expenditure but there is a difference. Purchasing simply means to obtain by paying money or its equivalent while investing means the outlay of money for income or profit. When you make a purchase the item you bought goes down in value. But when you make an investment the item will go up in value.
The opportunity costs may be viewed in two ways- personal and financial resources.
What do I mean? An important personal opportunity cost involves time that when used for one activity cannot be used for other activities. Time used for studying, working, or shopping will not be available for other uses. The allocation of time should be viewed like any decision. Select your use of time to meet your needs, achieve your goals and satisfy your personal values. Other personal opportunity costs relate to health. Poor eating habits, lack of sleep, or avoiding exercise can result in illness, time away from school or work, increased healthcare cost, and reduced financial security. Like financial resources, your personal resources time, energy, health, abilities, knowledge require serious management.
Financial opportunity costs:
On daily basis, we are making choices among various financial decisions. In making those choices, you must consider the time value of money—the increase in amount of money as a result of interest earned. Saving or investing N100 instead of spending it today results in a future amount greater than N100 naira. Every time you spend, save, invest, or borrow money, you should consider time value of that money as an opportunity cost.
Spending money from or savings account means lost interest earnings. However, what you buy with that money may have a higher priority than those earnings. Borrowing to make a purchase involves the opportunity cost of paying interest on the loan, but your current needs may make this trade-off worthwhile.
Setting aside funds in a savings account with little or no risks has the opportunity cost of potentially higher returns from an investment with greater risk.
Again, making annual deposits in a retirement account can help you avoid the opportunity cost of having inadequate funds later in life. Purchasing a new car or home appliance has the potential benefit of saving you money on future maintenance and energy costs.
The choices we make as a result of demands and the cost of those choices makes it imperative that we consider the costs in our financial planning process.
The forces of demand and supply influence interest rates. When consumer savings and investing increase the supply of money, interest rates will tend to decrease or drop. However, as consumer, business, government, and foreign borrowing increase the demand for money, interest rates tend to rise. But for the sake of emphasis, interest rates affect your personal financial planning.
For instance, the earnings you receive as a saver or an investor reflects current interest rates as well as risk factor based on such factors as the length of time your funds will be used by others, expected inflation and the extent of uncertainty about getting your money back.
Today, we will see the impact of opportunity costs in our personal financial planning process. In a couple of days we shall be celebrating the Valentine day. Though with some religious connotation, the day has over the years been turned to lovers’ day a day when lovers commit all sought of atrocities in the name of Valentine. But beyond the celebrations how would the valentine affect your personal finances? Did you budget for it or are you just spending for the fun of it? Is that bash necessary in view of competing demands for meagre resources? This brings us to the day’s topic The opportunity cost of valentine
Economics students would always tell you that opportunity cost simply means alternative forgone. What are you sacrificing for you to have a bash for valentine? In other words, what would be the cost of your valentine this year?
Are you sacrificing that investment in a bank’s public offering for a valentine bash? Have you been able to meet up with all your necessities or needs as postulated by the great psychologists Maslow? We are living in a world full of competing demands and the choices we make determine what our future will be.
But beyond that, have you noticed that you always give up something when you make such choices. In every financial decision you sacrifice something to obtain something else that you consider more desirable.
For example you might forgo current buying in order to invest funds for future purchases, or long term financial security or you might gain the use of an expensive item now by making credit payments from future earnings. Both purchasing and investing represent expenditure but there is a difference. Purchasing simply means to obtain by paying money or its equivalent while investing means the outlay of money for income or profit. When you make a purchase the item you bought goes down in value. But when you make an investment the item will go up in value.
The opportunity costs may be viewed in two ways- personal and financial resources.
What do I mean? An important personal opportunity cost involves time that when used for one activity cannot be used for other activities. Time used for studying, working, or shopping will not be available for other uses. The allocation of time should be viewed like any decision. Select your use of time to meet your needs, achieve your goals and satisfy your personal values. Other personal opportunity costs relate to health. Poor eating habits, lack of sleep, or avoiding exercise can result in illness, time away from school or work, increased healthcare cost, and reduced financial security. Like financial resources, your personal resources time, energy, health, abilities, knowledge require serious management.
Financial opportunity costs:
On daily basis, we are making choices among various financial decisions. In making those choices, you must consider the time value of money—the increase in amount of money as a result of interest earned. Saving or investing N100 instead of spending it today results in a future amount greater than N100 naira. Every time you spend, save, invest, or borrow money, you should consider time value of that money as an opportunity cost.
Spending money from or savings account means lost interest earnings. However, what you buy with that money may have a higher priority than those earnings. Borrowing to make a purchase involves the opportunity cost of paying interest on the loan, but your current needs may make this trade-off worthwhile.
Setting aside funds in a savings account with little or no risks has the opportunity cost of potentially higher returns from an investment with greater risk.
Again, making annual deposits in a retirement account can help you avoid the opportunity cost of having inadequate funds later in life. Purchasing a new car or home appliance has the potential benefit of saving you money on future maintenance and energy costs.
The choices we make as a result of demands and the cost of those choices makes it imperative that we consider the costs in our financial planning process.
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