Example

Alice deMoms has decided that she will need to replace her current automobile in the not-so-distant future, probably within two years. Moreover, anticipated changes in her lifestyle are going to dictate the need for a roomier vehicle capable of carrying more people and their things. So Alice decides an SUV is the best bet. Unfortunately, those vehicles are more expensive than conventional cars, and Alice likes to pay for her new auto outright, instead of over time through a loan.

The problem is, she had only planned to spend $20,000 on her next car, and the SUV she's eyeing will cost $25,000 two years from now, she estimates.

Alice has $60,000 in a secure low-interest savings account paying 3.5 percent annually, but feels uncomfortable liquidating any more than one-third of her account for the new vehicle. So she decides to move some money into a higher interest bearing account to make up the shortfall in savings.

Alice puts $20,000 into a mutual fund that ends up yielding 11.5 percent each of those two years: $20,000 x 11.5 percent (year 1) = $22,300 x 11.5 percent (year two) = $24,864.50. Had she left her $20,000 car purchase allowance in the savings account, she would only have $21,424.50 to spend on her new vehicle: $20,000 x 3.5 percent (year one) = $20,700 x 3.5 percent (year two) = $21,424.50.

If Alice had left the money where it was, her opportunity cost in terms of annual interest rate was 8 percent (11.5 percent - 3.5 percent). In terms of dollars, Alice's opportunity cost for doing nothing would have been $3,440.

Of course, opportunity cost is not the only factor to consider when saving money. The security of the investment and the risk of unguaranteed returns should be considered. For these reasons, Alice decides to keep the rest of her savings secure in the savings account. Although, for her next new car fund, she'll continue to put away money every month in the riskier, but potentially higher returning investment. After all, if the car fund doesn't perform as expected, she can always change her auto shopping goals. But if her savings were to disappear or underperform, this would be a much more troublesome outcome for her future.