My previous post explained how you can explain the concept of needs and wants to your children as you teach them how to manage money better. This post is all about teaching your kids opportunity cost.
Opportunity cost is simply the value of what you have to give up, so as to get something else. Armed with this definition, explaining opportunity cost to your kids is easier for you. Of course, you will need practical examples to really drive the lessons home. So how can you teach your children all about opportunity cost?
- Define it Using Items they are Familiar with: for instance, you want to get a calculator and a superhero action figure, but you only have enough money for one. If you decide the buy the calculator and leave the toy, then the toy is your opportunity cost: you had to give it up to buy the calculator.
- Explain Why Opportunity Cost is Important: kids are endlessly curious, and tend to ask a million and one questions. Your kids might ask you why you can’t just get both the calculator and the action figure. Explain to them that money is finite, limited: opportunity cost is necessary when you have just enough money to buy only one item. With the limited amount you have, you need to decide what would be the best thing to buy with it, and forgo the next-best item.
- Use Real-Life Situations that Don’t Involve Money: using real-life experiences that don’t involve money is also a good way to explain opportunity cost to your kids. “You can’t have ice cream AND cookies: pick one.” Or, “You can’t wear that pink sweater and the brown jacket: one has to go.” This makes opportunity cost much more practical, and helps them to weigh options and think of all the possible outcomes. What’s more, they learn to make independent decisions at a young age.
- Involve them in Every Day Financial Decisions: involve your kids in making simple house budgets, with the knowledge that there is just enough money for one item. This helps them prioritize, and knowing that there is only enough money for one helps to keep them focused.
Opportunity cost can be taught to kids as young as 5, and it helps them as they get older and start getting allowances for their parents. In the next post, we will learn about how to teach children the concept of delayed gratification.