Interest rates are also an important input in understanding the relative values of different asset classes and the opportunity cost of investment decisions.
Each investment is a decision, a decision that forgoes every other potential investment for the one you are choosing. Opportunity cost ties directly into relative value and is an important part of economic and financial planning as it helps ensure that funds, resources, and time are put to optimal use.
Opportunity cost = the return from the unchosen option – the return from the chosen option
The above focuses purely on the financial cost, but there are the costs of time and effort to consider as well. There may also be hidden or overhead costs in your calculation to consider.
