In my book Making Big Money Decisions, I explain how understanding opportunity cost can help you make better decisions when you’re considering a major purchase. But opportunity cost isn’t just about buying a car, a home, or other big-ticket items.
It applies to your everyday money decisions, too.
You may think your money is safe because it’s sitting in your checking account, Venmo balance, or waiting for you to pay your taxes. But there’s a hidden cost to letting money sit idle: opportunity cost.
As a refresher, opportunity cost is the value of the next-best alternative you give up when you make a choice.
Keep reading to learn where these opportunity costs may be hiding in your accounts.
The cash sitting in your account
Suppose you keep $5,000 in a checking account that earns little or no interest for 10 years.
If that money could have earned a hypothetical 7% annual return, it could grow to more than $9,800 instead.
That’s over $4,800 of potential growth you gave up by leaving the money idle.
The same idea applies to money sitting in payment apps like Venmo or PayPal. They’re convenient places to move money—but they are not the best places to store money for the long term.
The tax refund you didn’t need
The opportunity cost principle also applies to your income taxes.
If you receive a large tax refund, you may feel like you’re getting a bonus from the government. But it’s really money you already earned that you allowed the government to hold interest-free.
If you could have saved or invested an extra $2,000 throughout the year, that money could have been working for you instead.
Give every dollar a job
This doesn’t mean you should invest every dollar or keep no cash available. Money for everyday expenses and emergencies should be safe and accessible.
The key is to ask a simple question:
“What is this money supposed to be doing for me?”
If the answer is nothing, there may be an opportunity you’re missing.
Opportunity cost isn’t just something to consider when making big money decisions. It’s something to consider whenever you decide what to do—or not do—with your money.
Your money has a job. Make sure it’s working as hard as you are.
For a visual summary of this content, see the accompanying two-page information brief.