Balance Sheet Walk

Option A

Option B

Option C

Option D

Spend a dollar on A.

You will get the benefits that option A provides (financial or otherwise)

Spend a dollar on B.

You will get the benefits that option B provides (financial or otherwise)

Spend a dollar on C.

You will get the benefits that option C provides (financial or otherwise)

Spend a dollar on D.

You will get the benefits that option D provides (financial or otherwise)

Find the alternatives

Evaluate the alternatives

Decide

To make an informed decision, list the alternatives available for consideration.

There are usually different methods available to accomplish a desired outcome.

Work out the benefits of each alternative.

The benefits may be financial or non-financial. These should be quantified so that a reasonable comparison can be made of the alternatives.

After completing the analysis, you should be in a position to be able to make an informed decision.

Keep in mind that if you choose A, the opportunity cost is that you can no longer choose B or C or D.

If you are making an investment for a return, then there will usually be several strategies that can be considered. They will often give different returns (and have different risks).

For a financial goal, the return is a key factor in making the decision. If you invest in a very high return investment, usually the risks will be higher. The opportunity cost is clear - one investment provides a high return, but there is an associated big risk. The second investment pays a lower return, but also has a lower risk.

Opportunity cost requires you to weigh up the benefits of both. If you choose one, you loose the opportunity to invest in the other.

Several factors will influence your decision,including the financial return and the possible erosion of the capital invested (due to the risk factors).

Of course, sometimes the benefits are non-financial (e.g. spend money on schools or roads or hospitals). The concept of opportunity cost still applies.