Opportunity Cost, or Why Costco and Sam’s Club Aren’t Always a Bargain

Over the weekend, Sarah and I dug through our overstuffed food pantry in order to take stock of the items we had on hand as well as plan some meals for the upcoming week. What we found, more than anything else, was a lot of partially used bulk buys.

We found large bags of rice and beans, partially used. We found some quinoa, again, partially used. We found several rather large containers of dried spices that were simply not as aromatic as they once were. We found half-empty boxes of snack bars for our children’s backpacks (they’re still young enough that the school encourages us to send a small snack with them each day), as well as some juice boxes. There were some jars of pasta sauce, several boxes of pasta (that came out of larger jumbo packs), and several other odds and ends back there.

Thankfully, most of this stuff is still usable. A few items are past the “best if used by” date, but that doesn’t indicate that it’s something not to be used – it just means it might not taste as fresh or as good as other items. The herbs are definitely past their prime, but we can still use them, though we may use more than we normally would in order to impart an appropriate level of flavor – two teaspoons instead of one, for example.

There were a few items that we tossed. We came across a few snack items bought in bulk for picnics last summer that were… not good. There was a large jar of honey that had gone beyond what could be salvaged – it was practically one solid chunk of sugar and our usual tricks for recovering the honey didn’t work because it was so far gone.

It was painful, but some of that stuff hit the trash. It might seem like no big deal, but the truth is that every single item that went bad while it was sitting in our pantry is essentially money lost.

Naturally, I can’t help but wonder what I could have done with that money. When I tossed those items in the trash, I saw dollar bills and five dollar bills and 10 dollar bills going in there. I could have done a lot of worthwhile things and a lot of fun things with that money…

The same thing happens when I spend a lot of time on a project intending to save money and then I realize I’m actually saving very little money for the time invested. A great example of that comes from clipping coupons, something I used to do faithfully until I realized I just wasn’t saving much money for the time invested. I was almost always better off just buying the store brands, as that would save me almost as much as most of the coupons and it didn’t involve digging through websites or paper flyers to clip coupons. When you burn an hour to clip coupons and find out that the coupons are just lowering the prices of items down to the level of the store brands, it really feels like a waste of time.

Whenever I find that I’ve wasted time like that, I have similar feelings. What could I have done with that time? When I see that an hour or two has passed without doing anything useful – not genuine leisure, not genuine productivity, just wasted hours – I feel regret. I can’t help but wonder what I could have done with that time.

In both of these cases, I’m referring to the concept of opportunity cost.

Opportunity cost, as Wikipedia defines it:

In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives. Assuming the best choice is made, it is the “cost” incurred by not enjoying the benefit that would have been had by taking the second best available choice.

A great way to see this is through an example. Let’s say I have $50 to spend on a board game. I decide to spend all of it on this great game that a friend of mine has just raved about… but the game turns out to be an utter dud. I actively don’t want to play it any more. So I spend some time trying to trade it or sell it and I end up only getting about $20 back out of it after shipping.

Basically, I spent $30 and several hours on one play of a game that I didn’t enjoy and then trading and shipping that game.

On the other hand, I could have spent just a bit of time doing some research on how to spend that $50 and ended up realizing that the game wasn’t for me. Instead, I might buy a different game that I loved much more … or maybe even two different lower-priced games or sale-priced games. Or maybe something else entirely.

That $50 represents a certain amount of opportunity. Even if I use it in the best possible way, I’m still going to miss out on the benefits of other ways I might use it. If I use it in a way that is worse, then I miss out on the best opportunities for that money.

Whenever you spend money, time, or energy, there’s a real opportunity cost there. It’s something that’s well worth thinking about because it provides an extra benefit to spending a bit more time to make sure you’re being as optimal as possible when using your time, money, and energy.

One quick note: While opportunity cost is a valuable concept to understand, it is something that you can overthink to your own detriment. The idea of opportunity cost should inform your decisions and refine your decision making process, not lock you down and keep you from making decisions.

So, what are some time-effective strategies for taking advantage of the idea of opportunity cost?

Be thoughtful about how you use your time and money. One thing that I like to do is to use my driving time to rethink my decisions on how I use my time and money. When I’m on my way to the library or driving back from dropping off a child at soccer practice, I’m usually thinking to myself about my choices and how I could have made better ones. I usually reflect on the opportunity cost of the choice that I made and I try to find any choices that could lower the opportunity cost and bring better results into my life. Surprisingly, I usually think mostly about the little choices, like choosing a store brand when I’m shopping, as I find that little missteps that are repeated frequently actually add up to a pretty big deal so it’s good to get them right.

Mistakes are okay; the perfect is the enemy of the good. No one is ever going to be perfect in terms of the decisions they make. We’re all going to make mistakes. We’re all going to choose suboptimal routes. We’re all going to sometimes let something go to waste. It’s part of being human.

What matters is that we take stock of the mistakes we’ve made and try to improve from there. We wasted something and that’s okay, but what can we do to make sure that the mistake doesn’t repeat itself?

It’s better to make a second purchase than to throw stuff away. This, right here, is where we get back to warehouse clubs. I find that my biggest mistake at warehouse clubs is a pure opportunity cost mistake: I buy jumbo bundles of some items at Sam’s Club or Costco and then end up not being able to use that jumbo pack in full, so the rest goes to waste. I skipped over the opportunity to buy the smaller amount for less money and the difference between the two went to waste, so it’s basically as if I threw money out the window.

What I’ve learned over the years is that unless I am 100% positive that I’m going to use the whole bulk purchase, I’m better off not buying in bulk. Instead, I’m better off buying a much smaller package, even if that means spending more per item.

That means I rarely buy fruits or vegetables at warehouse clubs. I rarely buy anything that can easily go bad at home. I just skip all of that stuff. The comparison between buying a bulk purchase of fruit at the warehouse club for a bit cheaper per fruit (while running the risk of some of it going bad) versus buying a reasonable amount at the grocery store (with almost no risk of waste) is strongly in favor of buying the smaller, more reasonable amount. There’s no reason to pay good money for wasted food.

The question then becomes, do I still use warehouse clubs? The answer there is a resounding yes. I use them for nonperishable goods that I know I’ll use over time: trash bags, toilet paper, hand soap, and the like. I use them for bulk dry goods that will take a very long time to go bad, like rice and dried beans and so on.

Remember, a bulk purchase is only worth it if you’re absolutely dead sure you’re going to use all of it before it goes bad. If you have uncertainty about that, then buy a smaller package. It’s far better to buy the smaller package a second time if you must than it is to throw money away.

Good luck!

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Trent Hamm
Trent Hamm
Founder of The Simple Dollar

Trent Hamm founded The Simple Dollar in 2006 after developing innovative financial strategies to get out of debt. Since then, he’s written three books (published by Simon & Schuster and Financial Times Press), contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.

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