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Bestselling author Simon Sinek (Start With Why, The Infinite Game), says “Everything you want costs something. Deciding if the cost is worth it, is the question. Nothing is free.”
Oftentimes when you make decisions, the cost is something other than money. It could be choosing to retire later, perhaps deferring a vacation, or allocating your time differently.
When you consider what something costs, you are engaging in the process of tradeoffs. When you make investing decisions, tradeoffs abound. If you want more investment return, you have to accept more risk. That’s a tradeoff. The additional risk is the cost associated with the increased long-term potential return. As Simon Sinek says, you have to decide if the cost is worth it.
Tradeoffs are the foundation for the economics concept of opportunity cost. Opportunity cost is what would have happened with your money, (or other resources), if you used that money for another purpose. When you make a choice, you are losing the opportunity to choose something else. The overarching lesson that runs through personal economics is that all resources, including money, are finite.
Tradeoffs are sometimes described as the currency of decision making. Every decision, every choice carries with it an opportunity cost and tradeoff.
Tradeoffs impact all your resources, not just money. Your largest resource is time. You have exactly 168 hours each week. When you allocate time to one activity, some other activity necessarily receives less time.
Tradeoffs are not always readily apparent. It’s easy to think that some choices allow you to ‘have your cake and eat it too.’ As the complete idiom expresses, you can’t have your cake and eat it too. There’s always a cost, even if the cost takes a while to appear.
Tradeoffs are usually obvious when you consider them holistically within the overall framework of your life. If you place too much emphasis on work for instance, the tradeoff might be a stressed marriage or declining family life. When you focus too much on one area, the cost usually shows up within other parts of your life.
The necessity of making tradeoffs can change the way you feel about decisions, particularly those concerning money. In my experience, the emphasis on ‘maximizing investment returns’ places all the emphasis on possible gain, without adequate consideration of the cost. Simply being aware of tradeoffs can help you balance decisions by maintaining awareness that all choices have a cost.
Tradeoffs are much easier to accept if you have clear goals which reflect your long-term aspirations. When you understand what matters most in your life, natural priorities appear that directly translate into tradeoffs. Priorities help you avoid regret and keep you grounded.