Needs, wants and opportunity cost

Every single day you make CHOICES with your money, your time, and your attention. Economics is just the study of those choices. Two ideas do most of the heavy lifting: knowing the difference between a NEED and a WANT, and understanding the OPPORTUNITY COST of any choice you make. Get those two ideas right and you stop wasting money on stuff you do not really care about.

Needs — things required to live

A NEED is something you cannot live a healthy, safe life without. Needs are short and the same for everyone: food, clean water, shelter, basic clothing, and basic safety. If a need is missing, real harm follows — you get sick, hungry, cold, or unsafe. Needs come FIRST in any budget.

• FOOD that keeps you healthy — fruit, vegetables, grains, protein.
• CLEAN WATER to drink and to wash with.
• SHELTER — a roof, a warm bed, walls, a safe place to sleep.
• BASIC CLOTHING — a coat in winter, shoes, the clothes you actually wear.
• BASIC SAFETY — a working smoke alarm, a doctor when sick, a seatbelt.

Wants — things that make life nicer

A WANT is something that would be FUN or NICE to have but you can live a healthy life without. Wants are different for every person. Most of what we shop for is wants — toys, video games, fancy snacks, the latest phone, a movie ticket. Wants are not bad. They make life enjoyable. The trap is treating a want like a need.

• TOYS, video games, and trading cards.
• FANCY SNACKS — candy, soda, ice cream, takeout pizza.
• A NEW PHONE when your old one still works fine.
• MOVIE TICKETS, theme parks, concerts.
• NAME-BRAND clothes when a plain pair of shoes does the same job.

Opportunity Cost — what you give up

Money, time, and attention are LIMITED. When you spend them on one thing, you cannot spend them on something else. The OPPORTUNITY COST of a choice is the next-best thing you GAVE UP to make it. If you have $10 and you spend it on a movie ticket, the opportunity cost is the snack, the book, or the savings you no longer have. Every choice has one — even doing nothing.

1. You spend $10 on a movie. Opportunity cost = the snack you did NOT buy.
2. You watch TV for one hour. Opportunity cost = one hour of practice or play you did NOT do.
3. You spend your allowance on candy now. Opportunity cost = no saving toward a bigger gift later.
4. You eat your last cookie tonight. Opportunity cost = no cookie tomorrow.
5. Doing nothing is also a choice — its opportunity cost is whatever you could have done instead.

Smart Choices — weighing the trade-off

A TRADE-OFF is the swap you make: I take this and I give up that. Smart spenders ask three quick questions before they buy. Is this a need or a want? What am I giving up? Will I still feel good about this choice tomorrow? If you answer those out loud you will buy less junk and save more for what truly matters.