What does "opportunity cost" refer to in financial decisions?

Opportunity cost is a fundamental concept in economics and personal finance that refers to the potential benefit that is lost when one alternative is chosen over another. In financial decision-making, when you make a choice—whether it’s spending money on a particular item, investing in a specific asset, or allocating your time in any other way—you forgo the opportunity to pursue other options that might also provide a return or benefit.

Choosing one option inevitably means that others are not realized, and thus, the opportunity cost measures this trade-off. For example, if you decide to invest in stocks instead of savings bonds, the opportunity cost would be the returns you could have earned from the bonds during that time period. Understanding opportunity cost helps individuals and businesses evaluate the potential value of their decisions, leading to more informed financial choices.