Opportunity vs. Out-Of-Pocket Costs

• Out-of-pocket costs are monetary expenses. For example, gas, housing, utilities and entertainment are out-of-pocket costs. No one has an infinite amount of money, so money is a scarce resource and you must allocate your out-of-pocket costs accordingly; from the most vital to the insignificant. Opportunity costs are costs associated with making a choice. You cannot have your cake and eat it too; so when you choose Option A, the opportunity cost of receiving it is giving up Option B.
  
  

Education Decisions

• In his publication entitled "Opportunity Cost," David Henderson, research fellow at Stanford University, makes the point that opportunity and out-of-pocket costs impact education decisions. For example, a student attends an in-state school with a tuition rate of $10,000 per year and the student has $5,000 of that tuition paid for by government grants and scholarships. Does the student have half of his school bill paid each year? If you factor in the student's opportunity cost of being unable to gain full-time employment due to his school obligations, the answer is no. If the student decided to forgo school and sought full-time employment, he could earn $25,000 per year. So, the true cost of his tuition is $35,000, and the government and scholarships are covering only 1/7 of his costs, not half his costs. Many students must make the decision to forgo employment for a few years to gain an education. It is a choice and an opportunity cost. College tuition and fees are out-of-pocket costs.
  
  

Working Parents

• If you have young children, you must make a great deal of difficult decisions. A major choice is the decision for both parents to work. The opportunity cost of both parents working is that the child or children must be cared for by someone other than a parent while the parents are at work. The opportunity cost of only one parent working is the household may not be as financially stable.
  
  

Investments

• When you invest money in your IRA or 401k or when you purchase a savings bond or stock in a company, these are all investments. Investments all have opportunity costs, that is, the cost of waiting. When you place money into an investment, you are choosing to invest as opposed to spending the money on something else. The opportunity cost of investing is waiting to have the money available to spend.