What do opportunity costs refer to?

Opportunity costs refer to the benefits lost when choosing one alternative over another. This concept is a fundamental principle in economics and personal finance, emphasizing that every choice has a cost associated with it. When you decide to invest your time, money, or resources into one option, you forgo the potential benefits of an alternative choice that you could have selected instead.

For example, if you decide to spend your savings on a vacation, the opportunity cost could be the investment returns you would have gained had you placed that money in a savings account or stock market. Understanding opportunity costs helps individuals make better financial decisions by considering both the direct costs and the potential benefits they forego with every choice they make.