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What you give up by choosing one use of your money over another — the value of the option you did not take.
Why It Matters
Opportunity cost is what makes "safe" choices less obviously safe. Cash held in a savings account is protected from market falls, but over long periods its purchasing power can erode with inflation, and it is not participating in any growth. The same logic runs in reverse: money used to pay down a high-APR balance is not available to invest. Every allocation has a road not taken, and naming it makes the tradeoff visible.
Key Points
- The value of the alternative you passed up.
- Holding cash has a cost even though the balance does not fall.
- Applies to debt payoff and investing alike — both use the same dollar.
Related Terms
Common Questions
What you give up by choosing one use of your money over another — the value of the option you did not take. Opportunity cost is what makes "safe" choices less obviously safe. Cash held in a savings account is protected from market falls, but over long periods its purchasing power can erode with inflation, and it is not participating in any growth.
Opportunity cost is what makes "safe" choices less obviously safe. Cash held in a savings account is protected from market falls, but over long periods its purchasing power can erode with inflation, and it is not participating in any growth. The same logic runs in reverse: money used to pay down a high-APR balance is not available to invest. Every allocation has a road not taken, and naming it makes the tradeoff visible.
The value of the alternative you passed up.
Holding cash has a cost even though the balance does not fall.
Applies to debt payoff and investing alike — both use the same dollar.