Use Opportunity Costs to Help You Budget

Use Opportunity Costs to Help You Budget

I recently had the opportunity to co-host a webinar with the wonderful career coach, Dr. Norma Reyes. The theme of the discussion was “How to Have a Better Relationship with Money.” (If you missed it, you can check it out here).
I had two major “a-ha” moments during the discussion:

  1. I really enjoy talking to people about their money questions! This is relief, given that that is the purpose of this blog.
  2. Most money questions are actually psychology questions.

You heard right – most questions about money don’t result in a straight, black and white answer. More times than not, they lead to further questions about the person’s psyche, motivations, wants, and fears. We touched on this a little bit in 2 different posts: How to Invest Your 401k and 3 Money Questions You Should Stop Asking.

One area that you can really see the psychology involved in finance is when it comes to the topic of saving.


In my experience, people’s attitudes toward savings are strongly influenced by upbringing.

For example, my family and I are immigrants. We moved to the United States when I was 5 years old, and thanks to my parents’ hard work, frugal spending habits, and forward thinking, I was able to attend college and not incur student loans (thanks mom and dad!)

My savings habits have been modeled by my parents’ example- scarcity mentality and bargain-hunting have been instilled in me from an early age.

To give you an idea of how I grew up, when I went to Disney World for the first time and asked my dad for a souvenir, he responded, “A souvenir? What, did you lose the receipt?”

True story.

So, what does all this have to do with saving?

As a first-generation finance consumers, we’ve had to develop our own savings heuristics through trial and error. There’s no one method to force people to save, because money is a deeply personal thing. However, one thing that I’ve noticed when helping others is how powerful the notion of an opportunity cost is.

Opportunity costs are “the loss of other alternatives when one alternative is chosen.”

I use opportunity costs all the time to help me save money. I began using this when I graduated from college, and started my first “big girl” job in New York City. My parents and I hardly ever ate growing up, at home it was all about borscht and kotleti (my mom is Russian) or arroz con frijoles (my dad is Cuban). So here I was, a newly-minted college grad living in the Big Apple, ready to eat out every day!

Except, I rapidly noticed that spending money on lunch wasn’t all it was cracked up to be. I was also eating away at my spending.
Here’s where those opportunity costs kick in.

I quickly realized that even a crappy lunch costs ~$10. $10 per day, over the course of 5 weeks? That’s $50 per week. Assuming there’s 3 weeks in a month that’s about $150 per month on a sad lunch. Per year? That was $1,800 I was throwing away on mediocre food. In New York City, that’s how much my 1-bedroom studio apartment cost.

Eating out each day for lunch, over the course of the year, was gonna cost me about a month of rent.

I felt insulted.

From that point on, I buckled down and decided to bring my lunch to work. The mathematics of eating lunch to me didn’t make sense, and growing up as a latch-key kid, I had enough experience preparing meals for my parents when they came home to whip up some basic recipes.

Sidenote: who here remembers the anxiety you felt when you saw your parents come home and you forgot to take the meat out of the freezer? Still haunts me to this day.

One size does NOT fit all

Notice, I’m not making a blanket statement like “you MUST bring your lunch to work,” or “STOP eating avocado toast” or “save x% per month.” That’s ridiculous. Each person’s budget is personal.

I choose to save money on eating out, so that I have more money to spend on impromptu travel. Whereas other people plan vacations months in advance, I tend to “wing it” a bit more. I’m not saying I buy flight tickets the day before, but I allow myself a certain flexibility when it comes to travel planning, because I’ve balanced my savings equations elsewhere.

I don’t have to worry about it, because I know I’ve put in the savings throughout the year by bringing my lunch to work.

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