Even though the economists say finances are shaky around the world and in the average home, opportunities are still everywhere. You can see them in flat-screen televisions, college degrees, toys and restaurants with big flashing signs. Your child will make choices about the opportunities he encounters, which means part of your financial lessons have to include information on opportunity cost.
A Basic Definition
When your child buys something, he leaves behind other options. He undoubtedly will get some use or enjoyment out of what he picks, so his choice is not necessarily bad. Even so, each of the other items, or opportunities, he passes up has benefits, too. He loses out on those benefits when he decides not to buy those things. The loss of these benefits is opportunity cost.
Why is opportunity cost a problem for kids?
Most kids are impulse prone, meaning that they like instant gratification and are heavily influenced by what they feel. A lot of this is simply because they are still developing their rationalization skills. When kids make a purchase, they don’t always have the life experience or foresight necessary to really see all the reasons why one item might be better than another—they have trouble determining what the opportunity costs are and judging how they’ll feel in the future. Subsequently, they might be happy with something they buy for a little while, but then when presented with the consequences of the purchase (for example, not being able to buy something else later on), they get upset.
How can you help your child understand opportunity cost?
One big way you can help your kids learn about opportunity cost is to make that cost clear just before going to the cash register (or perhaps clicking the “submit order” button). “If…then” statements are very useful for this. For example, you might say something like, “If you buy this video game now, then you won’t have money to go to the movies tonight. Are you okay with that?” This helps your child look ahead into the future and identify what he’d potentially be giving up. If he complains later, you can go the route of, “Do you remember when we were in the store and I asked you…”
Another tip is to get your child to make simple lists of the pros and cons about each option. For example, you could point out that the one-player video game he wants can be played over and over, but that the basketball could provide some healthy, physical activity. This teaches your child not only to make comparisons, but to look critically beyond packaging to see what he’s really buying.
You also can help your kid by having some informal discussions about why he thinks one purchase is superior to another. This is important because his answers show you how he currently is rationalizing about money, revealing where he needs some more information or gentle correction. It is also helpful because the open dialogue establishes trust, meaning that it’s more likely that your child will come to you with other money and general questions.
A final point is that you should not provide a “bailout” if your child regrets what he’s purchased because of the consequences. You might be tempted to do this 1) to make your child happy in the moment, 2) to get some stress relief from his complaints and requests for something different, and 3) to let him—and others—maintain the impression that you and your family can afford to have what you like and want. The problem with a bailout is that it essentially hides the opportunity costs. Your child likely will not learn to truly prioritize, because he might come to believe that everything is accessible to him. You undoubtedly will find yourself struggling to keep up with the next demand, and later on, when your child is on his own, he might have real difficulty with debt, overspending due to his perception of everything as within reach.