Each of one of us makes hundreds of decisions about our personal and financial life based on our daily and future needs. The concept of time value and opportunity cost are important if you know how valuable your time really is. The way conceptualize this idea is by taking my hourly $20/h and assigning a value of what I am doing and if its worth my time to do it. Essentially, I am checking if I am paying myself enough to do this activity.
Every decision has an effect on our personal and financial lifestyle and needs to be taken seriously. Think about it, every decision you make is a choice of not doing something else.
Financial & Personal Costs
We all should have remembered these concepts in our very first economics class. First financial costs are those directly affecting your money. Whereas, personal costs are types of activities that you do instead of another. All in all, it’s about trade-offs of every decision you make.
Everyone should be thinking about what they do financially every time they choose to spend, save, invest or borrow money. The time value of money is an important idea because it allows you see the cost of your decisions in a quantitative manner. Since interest rates are slowly beginning to rise, holding your funds in a savings account that pays you 0.02% or 1.5% has huge consequences.
Example 1: Let’s take you have $20,000 in the bank at 0.02% APY. You have earnt yourself $4.00 for holding your money in a savings account.
Example 2: Let’s look at $20,000 in the bank at 1.5% APY. This is where it gets a little juicy you have earnt $300.00
There are online banks that are offering these kinds of interest rates and even higher rates if you put them in a certificate of deposit (CD) locked in for a year or more! Allybank.com and marcus.com are offering these rates and it’s a no-brainer why I would stick my money in an online bank! PAY ME MORE and ill give you my business banks! [I don’t get any referral fees for saying that, just saying your stupid if you don’t do this]
Here’s the difference between financial opportunity and personal opportunity costs, I think about what certain activities will generate future sources of income or more income like earning a bachelors degree, learning a new skill, or cutting costs like cooking more at home. If I do something that benefits me in the future that has a direct benefit to my lifestyle and income I will TRADE the time to earn money to learn the skills and gain the knowledge to earn me more money in the future.