Let’s say you've just received a $10,000 bonus! Congratulations! Now, the big question: what should you do with it? Should you put it towards paying down your mortgage, or should you take a plunge into the stock market? Let's break it down and find out what might be the best move for you.

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Understanding Opportunity Cost:

First things first, let's talk about opportunity cost. Opportunity cost refers to the potential benefits that you miss out on when you choose one alternative over another. It’s the value of what you lose by making a particular decision. 

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It's a fancy term, but it basically means considering what you're giving up by choosing one option over another. In this case, it's about weighing the benefits of paying down your mortgage versus investing in stocks. Let me break it down for you:

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• Opportunity cost represents the forgone benefit that would have been derived from an option other than the one that was chosen.
• It’s a forward-looking measure that compares the expected returns of different options and weighs them against each other

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Beyond Dollars and Cents

Opportunity cost isn’t limited to financial decisions. It sneaks into our everyday lives:

• Time: Spending an hour binge-watching Netflix? That’s an hour you could’ve spent learning a new skill or writing that novel.
• Career Choices: Accepting one job offer means rejecting others—each with its unique perks.
• Relationships: Committing to one person means missing out on other potential connections.

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Remember, opportunity cost isn’t about regret; it’s about awareness. Here’s how to navigate the maze:

• Evaluate Options: Consider all available paths. What are the potential gains and losses?
• Prioritize: What matters most to you? Money, time, experiences, or relationships?
• Embrace Trade-offs: Every choice involves trade-offs. Embrace them consciously.

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Example of Opportunity Cost:

Paying down your mortgage might seem like a smart move. After all, you're saving on the interest you would have paid over time. Let's say your mortgage interest rate is 4%. By putting $10,000 towards it, you're essentially saving 4% on that money each year.

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On the other hand, there's the allure of the stock market. Historically, it has provided returns of around 8% or more. That means if you invest your $10,000 wisely, you could potentially earn more than what you'd save by paying down your mortgage.

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Considering Marginal Impact:

Now, let's talk about the marginal impact. It sounds complicated, but it's really just about looking at the percentage return rather than just the dollar amount. Sure, saving tens of thousands of dollars on your mortgage sounds great, but if you could potentially earn even more by investing in stocks, it's worth considering.

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Let’s crunch the numbers:

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Opportunity Cost = Return on Most Profitable Investment Choice (RMPIC) - Return on Investment Chosen to Pursue (RICP)

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In our case:

• RMPIC (Stock Market) = 8%
• RICP (Mortgage) = 4%
• Opportunity Cost = 8% - 4% = 4%

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Conclusion:

By choosing to pay off your mortgage, you’re sacrificing that extra 4% return. So, what's the verdict? Should you pay down your mortgage or invest in stocks? Well, it ultimately depends on your financial goals and risk tolerance. 

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If you prioritize saving money on interest and want a more stable option, paying down your mortgage might be the way to go. But if you're willing to take on some risk for the potential of higher returns, investing in stocks could be worth considering. Remember, there's no one-size-fits-all answer, so take the time to weigh your options carefully before making a decision.

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