Kids & Money Lesson 2: The Value of Opportunity Cost
We are all rational creatures – it’s what separates us from the rest of the animal kingdom. That is until you throw money into a situation. Then rationality can often take a backseat to emotion. That’s exactly our concern as parents when teaching our kids about money. So what do we do about it? Well, we do something hundreds of times a day that we can exploit to help our children in this regard – we make choices. And every time we make a choice we weigh the opportunity cost of those choices. This is a rational thought process. All you truly need to do is to open up one of those choices and invite your children to dialogue the opportunity cost with you. The key is to use the words “opportunity cost” each time you run through the exercise.
Why? This exercise highlights the difference of approach to analyzing choices between children and mature adults. As you know, most children make their decisions based on immediate benefit only: “What’s going to make me happy right now?” As we grow older, our maturity is partially reflected in the ability to consider cost as well as benefit when making a choice. We, as adults, can appreciate delayed gratification and will further analyze what may be given up in not choosing the alternative. Therefore, using the words “opportunity cost” and having your kids consider what is lost in the choice they didn’t take helps them make more mature decisions.
An excellent example of this exercise would be a visit to the grocery store. You have choices such as, When should I go? What route should I take? Where should I park? Basket or cart? Which section should I start in? Brand or Generic? Organic or not?
You only need to open up one of those choices and invite your kids to the discussion. Let’s take ‘where should I park’ as an example. My family’s discussion would go something like this:
Me: “What is the opportunity cost of parking far away from the store?”
Son (age 12): “C’mon, dad. This trip is going to take forever if we do that.”
Me: “Time is an opportunity cost on that choice. What is the opportunity cost of parking close?”
Daughter (age 9): “We won’t get to walk as far holding hands.”
Me: “Parking far from the store it is!”
Without this understanding of opportunity cost, our children are programmed by a society that flaunts immediate gratification and goads you to buy what makes you happy in the moment.
Remember, opportunity cost is simply an exercise in rational thought. When it becomes second nature to your kids, it will naturally show up when they deal with money.