Glossary · Economic ideas
Opportunity cost
Opportunity cost is what you give up when you choose: the value of the best other thing you could have done with the same money or time.
Also called: alternative cost, the cost of a choice, trade-off
Oct 2026. On $10,000 that is about $405 a year: the price of leaving it in cash that earns nothing.
In plain words
You have a free evening. You could work a shift and earn $80, or go to a concert with friends. If you pick the concert, its real cost is not just the ticket: it is also the $80 you didn’t earn. That missed alternative is the opportunity cost.
Every choice has one, because time and money are scarce: spending them on one thing means not spending them on another. The opportunity cost is the value of the best option you passed up, not of all of them added together.
It hides in places people forget. Money kept in a drawer seems to cost nothing, but it could have earned interest. A 3-month US Treasury bill pays 4.05% a year now (Oct 2026), about $405 a year on $10,000.
Example
$10,000, three choices, 30 years
Suppose someone had $10,000 in Oct 1996 and three options. Looking back, each one had an opportunity cost.
- Keep it in a drawer: still $10,000 today, but it buys only what $4,714 bought in Oct 1996.
- Keep rolling it over in 3-month Treasury bills: about $19,638 by Oct 2026, with almost no risk along the way.
- Put it in the S&P 500 with dividends reinvested: about $186,117. The price of that choice was risk: along the way it fell as much as 49% from a peak.
Choosing bills had an opportunity cost of about $166,479. Choosing stocks had one too: years of nerve-racking drops, with no guarantee in advance that it would turn out this way.
One level deeper
Economists count opportunity costs even when no money changes hands. A student’s cost of college includes not only tuition but the wages they could have earned in those years; a company that uses its own building should count the rent it could have charged someone else.
It is the idea behind comparative advantage: a country or a person should do what it gives up the least to do, not necessarily what it does best. It is also why economists ignore sunk costs, money already spent that no choice can bring back.
For savers, the usual yardstick is the interest on very safe government debt, such as Treasury bills. When interest rates are near zero, holding cash costs almost nothing; when they are high, every idle dollar has a visible price.
$10,000, 30 years ago: stocks, bills or a drawer
Three ways to hold the same $10,000 from Oct 1996. The gap between any two lines is the opportunity cost of choosing the lower one, measured after the fact. Along the way, the top line was also by far the bumpiest.
The numbers behind the chart
| Date | S&P 500, dividends reinvested | 3-month Treasury bills | Cash in a drawer |
|---|---|---|---|
| Oct 1996 | $10K | $10K | $10K |
| Dec 2000 | $20.1K | $12.3K | $10K |
| Dec 2010 | $22.7K | $15.3K | $10K |
| Dec 2020 | $82.1K | $16.3K | $10K |
| Dec 2022 | $89.6K | $16.5K | $10K |
| Dec 2023 | $109K | $17.4K | $10K |
| Dec 2024 | $142K | $18.3K | $10K |
| Dec 2025 | $164K | $19K | $10K |
| Oct 2026 | $186K | $19.6K | $10K |
Why it matters
It turns “Can I afford it?” into a better question: “What else could I do with this money, or this time?”
It explains choices that look odd at first: a surgeon who pays someone to mow the lawn, a country that imports food it could grow itself.
It keeps the hidden costs of both safety and risk in view: cash gives up interest, bonds give up stocks’ higher average return, stocks give up certainty.
A common mistake
Myth: If something is free, it costs nothing.
In fact: A free ticket still costs the evening you spend using it, and a “free” app is paid for with your time and attention. The opportunity cost is whatever else you could have done instead.
Questions people ask
How do you calculate opportunity cost?
Take the value of the best option you did not choose and compare it with the one you did. If you could earn $80 working but go to a $40 concert instead, the evening costs you $120: the ticket plus the wages.
What is the opportunity cost of holding cash?
The interest it could have earned. A 3-month US Treasury bill yields 4.05% now (Oct 2026), so $10,000 left idle for a year gives up about $405 before taxes.
Is opportunity cost the same as a sunk cost?
No, they are opposites. An opportunity cost lies ahead and can still be avoided by choosing differently. A sunk cost is already spent, so it should not change your next decision.
Read more on BigCapital
About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- 3-month Treasury bill, secondary market rate: Board of Governors of the Federal Reserve System, H.15 Selected Interest Rates, series TB3MS; retrieved from FRED, Federal Reserve Bank of St. Louis.
- S&P Composite price and total return since 1871, and US consumer prices: Robert J. Shiller, Online Data (shillerdata.com); total return with dividends reinvested monthly, calculated by BigCapital.
- Treasury bill returns are approximate: the monthly average rate (discount basis), earned one month at a time. S&P 500 prices are monthly averages of daily closes, so the worst fall shown is smaller than the fall from the highest to the lowest day. The cash in a drawer is shown at face value; what it buys comes from US consumer prices.
- This page explains a term. It is not investment advice.