Understanding Sunk Costs
Have you heard the expression ‘throwing good money after bad’? Well this idiom can also be applied to understanding sunk costs!
Let me explain… have you ever spent money on an item or experience and later, had to pay more money towards the same original expense? This could be considered throwing the good money after the bad, or making a decision based on sunk costs.
Sunk costs are when you spend time, money or effort on something and it cannot be recovered. Many experts say that you shouldn’t make a decision based on sunk costs. Sunk costs is a term often used in the business world, but it applies really well to your personal finances too!
Check out today’s LimorTV episode for a more detailed explanation of sunk costs and some examples where you might be wasting money because of the possibility that you’re not considering sunk costs. Plus, you’ll get a sneak peek of my amateur golf skills 🙂
Once you recognize that sunk costs are gone, and in the case of personal finance, it is money spent that you can’t get back, you may be able to achieve greater peace of mind when making subsequent financial decisions.
For most of us,dealing with money issues brings about huge feelings of guilt. Guilt for spending, guilt for not spending, guilt for not saving enough, guilt for lots of shoulda coulda wouldas. At the very least when you have an understanding of sunk costs, you can make well-informed decisions giving you peace of mind.
Once you accept that sunk costs are something of the past, that you can’t recover, then you may be able to achieve greater peace of mind when making subsequent financial decisions. You won’t necessarily spend more time, energy and money on them.