Before buying anything, cost is probably one of the many factors that you’ll take into consideration before making a decision.
This is because, for most of us, money is a finite and precious resource, so we want to make sure that we spend it wisely and consciously.
One of the ways we do this is via a simple cost-benefit analysis: estimating how much a purchase may benefit us or the people around us, and whether or not this benefit is worth the price we’re paying.
But all too often, many of us only account for the cost of the item/service directly in question – which usually only makes up a portion of the total cost we’ll end up paying as a result of the purchase.
The truth is that there are many other costs we need to consider before making a decision regarding a purchase.
In this post, I’m going to talk about 3 such costs – hidden costs, complementary costs, and opportunity costs.
1: Hidden Costs
These are applicable costs that are often not actively discussed or communicated from the seller to the buyer.
The most common occurrences of these are in the financial sector, where there can be multiple layers of fees between the cost of the service or product and the final amount payable.
For example, when it comes to investing, many people often refer to the price of a stock or ETF when deciding whether or not it’s a good time to buy or sell.
Timing the market is a problem in and of itself, but the stock price alone doesn’t paint the full picture about such a decision.
You may be charged many different fees such as currency conversion fees, taxes, settlement fees, management fees… You get the point.
While all these fees often seem small, when added together, they can become a sizeable amount that eats away at the returns you stand to make on your investment.
If you ignore these hidden costs, you’ll end up giving away more of your profits to financial companies than you’d like to.
2: Complementary Costs
This refers to the cost of other items/services that are necessary to support or complement your initial expense.
One of the best examples to illustrate this is when buying a house.
As if houses in Singapore aren’t expensive enough, the total cost involved in buying a house includes other expenses.
Renovation works, furniture, moving services, utility bills, insurance, maintenance works – all of these are complementary costs that you can’t avoid when it comes to being a homeowner.
If you only look at the cost of the house when considering whether or not you can afford it, you’re probably going to end up overstretching your finances and pay a lot more than you were expecting to.
Complementary costs can also be found in our everyday lives.
When you buy a new electronic device, you’re probably going to need to buy a protective case, a screen protector, and other accessories.
Complementary costs don’t have to originate from an expense – they can arise from other decisions as well.
When you take up a high-paying corporate job at a renowned MNC, you’ll probably need fancy dress clothes paired with a matching bag, watch, shoes, and other accessories.
You may also incur additional food costs since the company is probably located in CBD, where cheap food options are scarce.
All of these may dwindle away the attractive salary that you’re receiving, and you may not end up saving more than you would if you had taken up another job that appeared to be less attractive on the surface.
3: Opportunity Costs
This is a term you’ve probably heard of before, especially if you’ve studied Economics.
It refers to the benefit that would be derived by an alternative that is foregone as a result of a decision.
Opportunity cost arises due to the fact that everyone has a limited amount of resources, so any resource being spent inevitably results in fewer resources available for other purposes.
For example, if you were to buy a new iPhone for $1000, it means you have $1000 less to use for any other purpose, and anything else that you could’ve used the $1000 for is an opportunity cost.
This may include going on a short vacation, paying for necessities, earning interest in a bank account, or earning returns as an investment.
Considering the opportunity cost of an expense is helpful because it can provide you with a basis for comparison as to whether or not the expense may be worth it.
Let’s say I’m eating at a cafe and I start feeling thirsty. I contemplate whether or not I should get myself a drink, and I see that the average price of a drink costs $8, or $10 after GST and service charge.
I also know that for $10, I could get myself a nice t-shirt from UNIQLO.
So instead of wondering whether I feel like paying $10 for a drink, I can simply ask myself which I’d rather choose if I could only pick one – the drink or the t-shirt.
That’s not to say that I have to go and buy the t-shirt the next time I pass by UNIQLO (though I might) even if I chose the t-shirt over the drink – it’s merely an exercise to help me decide how much I value one alternative over another.
Opportunity cost can also be intangible, such as in the form of time.
The time that you spend doing one thing means less time available to spend doing another – because everyone only gets 24h a day.
A good example of when time often ends up as the opportunity cost is when you do research about a purchase that you expect to make, hoping to get the best deals and the most value out of your spending.
While this could help you save money, it costs you time that could be spent doing other things that may be more productive or that you enjoy more.
So it might be helpful to consider what the best use of your time would be.
To summarise,
3 costs that we should think about other than the dollar cost of the product or service are:
- Hidden Costs
- Complementary Costs
- Opportunity Costs
Understanding hidden and complementary costs give us a more cohesive understanding of how much we can really expect to pay, and thinking about opportunity costs makes us question how we really want to spend our money and time.
Considering these costs can potentially help us make better, more informed financial decisions and cultivates intentionality.
What are some other costs that you take into consideration before making a purchase? Let me know in the comments below!