Learn / Part 1 · How Money Works
Every Choice Has a Price
What does every choice really cost?
In brief
Every use of money is a decision not to use it another way. Seeing the full price (the cash, the running costs and what the money could otherwise have done) changes many choices.
Key ideas
Opportunity cost
The real price of a choice includes the best alternative you give up.
Make an insight card →Total cost of ownership
Running costs usually outweigh the purchase price over the years you hold something.
Make an insight card →Incentives shape advice
Sellers are paid to sell. Asking how someone is paid is not rude; it is part of the price.
Make an insight card →Try it
True cost of owning
The price tag is only part of what a purchase costs. Running costs recur, resale value returns some money, and the money tied up could have been working elsewhere: that is the opportunity cost.
Open the full page: formula, variables, worked example and cautions →
Red flag
A deal that is “only” a small amount per month, with no total.
Ask before you sign
- What is the total cost over the whole period?
- How are you paid if I say yes?
Do this week
Next time you are quoted a monthly price, ask for the total.
Try it · 10–45 minutes
Pick one recurring expense and calculate its cost over five years, including what the money could have earned.
Pause and reflect
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Words worth knowing
- Opportunity cost
- What you give up by choosing one option over the next best.
- Incentive
- What motivates someone to act, including how a seller, adviser or lender gets paid.
- Fee
- A charge for a service. In finance, fees are often small in percentage terms but large over time.
Companion notes written for this website, based on the topics of Chapter 4. They explain ideas and do not reproduce the book. General information, not personal advice.