Opportunity Costs involve more than price. Would you pay $100 to Change Batteries?
What is opportunity cost?
Opportunity cost is the value of the best alternative foregone when making a decision. In other words, it is the cost of choosing one option over another. When you choose to do something, you are also choosing not to do something else, and the benefits of that alternative choice are the opportunity cost.
It refers to the value of the best alternative forgone or sacrificed in order to pursue a certain course of action.
I own a Short Term Rental Property in Hilton Head Island South Carolina with my wife. We reside in the suburbs of Chicago. The condo is a beautiful place, and my family loves it. So does everyone who stays there. But with home ownership comes hassles. My wife and I self-manage the property, which is fine until you need help with changing a light bulb, or batteries, or taking out the garbage.
We need help, you just can’t do everything by yourself. We have help with people who live on the island to help us manage the problems that arise during and after guests stay at our property. Since we live 1000 miles from our STR we can’t get there in a timely manner for the little stuff like changing the batteries on the door lock. They drain faster than you think! Although we make it there and stay a couple of times a year things happen without notice. This is where our Property Manager comes in to help.
I am a short flight and an out and about an hour’s drive from Savannah, GA to the condo in Hilton Head Island, SC. This means I would have to buy a plane ticket to Savannah from Chicago. The 1 ½ hour flight is not that much money, typically around $400-$500 round trip. Then I have to rent a car. If it was just a quick in-and-out trip for one day, the car would be around $200 including gas. I would also need to include my time, Let’s say I make $100 an hour for gigs. It’s a full day’s work, eight hours so that’s $800. Now if I just went to Hilton Head to replace the dead batteries in my front door so my guests can get in, it would cost me around $1500. Now these are just my monetary costs. The time wasted doing this I could’ve spent doing other things to try to make it to her dollars an hour so not only would I have spent $1500 I could’ve missed out on $1000, so it’s a $2500 loss. Or I could pay somebody $100 to buy batteries and replace them and all I must do is make a phone call so in this case in every case yes you would spend $100. To change batteries. This is the opportunity cost in a nutshell.
Penny-Wise and Pound Foolish
The phrase "penny wise and pound foolish" is a proverb that refers to a situation where someone is overly focused on saving small amounts of money in the short term but is not considering the long-term consequences or potential cost savings that could result from a larger investment or change.
The phrase’s exact origin is unknown, but it is believed to have originated in Britain and has been in use since the 17th century.
John was known for his frugality. He prided himself on being penny-wise and always seeking out the best deals and discounts. His friends often teased him about his extreme cost-cutting measures, but John brushed off their comments, believing that he was making wise financial choices.
One day, John decided to purchase a used car. He spent weeks researching various models, scouring online classifieds, and visiting multiple dealerships. Eventually, he found what seemed to be a great deal on a five-year-old vehicle with low mileage.
Excited about his find, John negotiated with the seller and managed to knock off an additional few hundred dollars from the already discounted price. He patted himself on the back for his excellent bargaining skills, convinced that he had made a wise purchase.
However, as John soon discovered, his victory was short-lived. Within a week of driving the car, he started experiencing mechanical issues. The engine began making strange noises, and the transmission started acting up. John realized he had overlooked getting a proper inspection before buying the car due to his eagerness to secure a lower price.
Frustrated and anxious about the mounting repair costs, John took the car to a mechanic, who informed him that the vehicle required extensive repairs that would cost several thousand dollars. John's heart sank as he realized that his pursuit of saving a few hundred dollars had led to a much larger financial burden.
In hindsight, John realized that he had been penny-wise but pound-foolish. While he had saved money upfront by haggling down the price, he failed to consider the long-term consequences of buying a car without a thorough inspection. The money he had saved seemed insignificant compared to the hefty repair bills he now faced.
From that experience, John learned an invaluable lesson about the importance of balancing thriftiness with informed decision-making. He understood that being penny-wise in small matters is commendable, but it should never come at the expense of making well-informed choices in significant investments like a car.
The opportunity cost for being penny-wise and pound-foolish is great. I understand the opportunity costs of paying 100 dollars to have someone change batteries. The option is going because I got tickets on sale, had a coupon for the batteries, and a discount on the rental car. If you know the opportunity cost associated with certain actions you will avoid being penny-wise and pound-foolish.
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