Getting them ready for when opportunity knocks.

How to teach kids about managing opportunity costs

We can’t have everything we want in life. Our wants are limited by money, time and supply. Understanding opportunity cost helps kids make better decisions by reinforcing the value of money and how to delay gratification. It’s a smart money skill that’ll set them up for life.

So, what is an opportunity cost?

Throughout life we’re all presented competing choices. The opportunity cost is the value of the choice you don’t pick or what you give up when you choose the other option. Learning to make smart choices now can be the difference between success and failure later.

Here are some examples of everyday opportunity costs kids can often experience.

Opportunity choice	Opportunity cost
Choosing to play video games instead of doing homework.	Lost time, possible lower grades and less free time later on.
Deciding to spend money on a toy instead of saving it.	Not having enough money to buy something different or valuable later.
Choosing to watch TV instead of going outdoors to play.	Missing out on exercise, fresh air and socialising with your friends.
Deciding to eat junk food instead of healthy food.	Potentially poorer health and lower energy levels.

Techniques for teaching it to kids

Here are some simple tips for teaching the concept of opportunity cost to your kids.

First: present your kids with a choice of two different treats. Let them pick one. The one they didn’t choose is the opportunity cost.
Next: explain that sometimes we have more than one option to choose from.
When that’s the case, the opportunity cost is the value of the next-best alternative.

To demonstrate, hold out three different treats and tell them they can only pick one but to name a second choice too. Their second choice is the opportunity cost. The third treat – or any number thereafter – is not counted as an opportunity cost.

The opportunity cost is always the value of the second-best choice you give up.

Teen tip.

For teens, it could be giving them real-life examples like watching TV or going out with friends.

Why it’s an important life skill

When kids learn about opportunity cost, they start to understand that every decision has consequences and it’s not just the immediate trade-off you need to weigh up but the long-term impact your decision will have on you too.

Weighing up opportunity costs means thinking beyond the present and assessing alternative uses for your money.

It’s about being far-sighted, not short-sighted.

The information is current as at publication.