The Most Important Factor to Consider When Making Decisions

The average person makes around 35,000 decisions per day. That's quite a few. These decisions are what make us who we are. They shape our lives and determine where we'll end up. Don't you think it's important to consider every factor so you can make the best decision?

Well, unfortunately, this usually isn't the case. People tend to overlook the most important factor to consider when making decisions: opportunity cost.

The Power of Opportunity Cost

I see this all the time in real estate. First-time homebuyers are always buying more house than they need. They want to live in their "dream house", but don't realize how much it can cost them. Sure, they understand the money coming out of their pockets each month for the mortgage payment. What they fail to think about, though, is the cost of the opportunities they've lost.

Let's say a couple is looking to buy their first home. Together, they bring in around $6,000 per month after taxes. They don't have any children yet, so they don't need much space in order to be comfortable. They can easily find a nice home that costs them around $2,000 per month, but they choose a different option. Their real estate agent and the bank keep telling the couple that they can afford $3,000 a month to get the house of their dreams. Why would they turn down the chance to live in the house of their dreams?

This is something that happens every day, but not always in the same form. People aren't taught to consider the opportunity cost of their decisions, which is a huge problem. Every decision we make has an opportunity cost, but we're so focused on the option we choose that we forget to think about what we're giving up in the process.

If that couple chose the cheaper house instead, they would save $1,000 per month. At an 8% annual return, that money would grow to $182,946.06 in 10 years. It would grow to $589,020.42 after 20 years! That's a significant amount of money to give up to live in a bigger house. If the couple thought about that before they bought the home, they might've reconsidered.

Related: Why Your Primary Residence Should be Viewed as an Investment, Even Though It Isn't One

Wait, There's More

Money isn't the only consideration when it comes to opportunity cost. Opportunity cost can involve time, health, relationships, and millions of other things. Skipping the gym every day gives you more time, but it costs you your health. Choosing to do everything yourself can save you money, but it costs you time. Every decision you make has multiple choices to pick from. When you make a decision, you're giving up the other choices that were available.

The way to make the best decision is to understand what you're giving up in return. This enables you to determine what is most important to you.