Opportunity Cost

Personal Finance

Opportunity cost is the value of the next-best alternative you give up when making a financial choice. Every financial decision has an opportunity cost -- the return or benefit you forego by choosing one option over another.

In detail

Key opportunity costs in Indian personal finance:n1. Keeping Rs 10L in savings account (3.5%) vs liquid fund (7.2%): opportunity cost = Rs 37,000/yearn2. Prepaying home loan (8.5% return) vs equity SIP (12% expected): opportunity cost = 3.5% per yearn3. Buying car vs investing: Rs 10L car loan EMI opportunity cost over 5 years vs investing that EMI in equityn4. Early EPF withdrawal for vacation: Rs 5L withdrawn at 30 = Rs 5L x (1.0825)^28 = Rs 42L lost at retirement

Formula

Opportunity cost = Return on best alternative - Return on chosen optionnAnnual: Rs 10L x (7.2% - 3.5%) = Rs 37,000

Real-life example

🇮🇳 India example

Meena keeps Rs 5L in savings account "for emergencies." Opportunity cost vs liquid fund: Rs 5L x (7.2% - 3.5%) = Rs 18,500/year. Over 10 years: Rs 2.97L lost to inaction. Solution: move Rs 4L to liquid fund, keep Rs 1L in savings for instant access.