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Coming out of college in the current economic climate is a scary situation. Even assuming recent grads are lucky enough to be able to hit the ground running with a steady job, there are a lot of other factors to consider in order to maximize one's financial situation. There are many important questions to ask yourself. If I move out of my parents' house, should I rent or own? Should I save money and live at home for a few years? If I need a car, should I finance a new car or buy a less expensive used car? Should I pay off my student loans early or make low monthly payments? Each of these situations presents a different opportunity cost, and, really, the only right answer to any of the questions is to weigh the different outcomes and determine what will work best for you.

Opportunity cost is the cost of a substitute that must be given up in order to follow another mutually exclusive action. In other words, will the benefits of one option outweigh the benefits of choosing its alternative? In each of the questions presented above, only one option can be chosen. So let's take each situation one at a time.

After college, it's natural to want to feel the independence of moving out of your parents' house and getting your own place to live. A common notion is that renting is just throwing money away. It's true that the money you pay towards your rent will never be seen again, but home maintenance costs drop tremendously when renting, assuming you have a landlord who will take care of household repairs. In addition, a year-to-year lease gives you the option of just picking up and moving if so inclined at the end of the year. On the other hand, owning real estate is an investment that most hope will pay off in the future. With proper upkeep and a beneficial housing market, one's house could be worth much more than what it had originally cost to buy. But the opportunity cost of owning a home is that your money is now almost entirely tied up in a mortgage and the upkeep of the house, when it could alternatively have been used on lower rent, more flexibility, and more money for leisure activities. But perhaps the smartest (though least desirable) decision in regards to your living situation would be to move back home after college. The amount of money saved in just a year or two could significantly increase the funds you have available for a future down payment, thus reducing mortgage payments and freeing up money for your newly independent life.

Housing situation aside, getting around every day is another dilemma. Assuming you buy a car, there are, again, a few things to consider. Is it best to finance with a multi-year loan or save up and pay all at once for an older car? This again presents opportunity costs. While you'll be saving by not having monthly payments, older cars generally bring with them higher maintenance costs. Also, an older car may not offer the lower gas consumption of a newer, more energy-efficient vehicle. But then again, with a newer and financed car, money is tied up in monthly payments when it could have been invested in other prospects. The interest payments of a car loan add up. In the end, regardless of the term of the loan, you'll be paying more than the price of the car due to your interest payments. Finally there is a third option which, again, is less desirable than the independence of owning your own car: public transportation.

Last in the presented post-graduate opportunity costs is the paying off of student loans. You may not realize the opportunity cost that already went into your decision to attend college. Four years' worth of salary was foregone in the hopes of the greater earning potential that comes with a college degree. Now comes paying off that degree. Most student loans have terms of ten, fifteen, twenty, or more years. For that reason, unless your school was exceptionally expensive, monthly student loan payments are generally on the lower side. Paying off a student loan early may seem like an enticing option, but it won't make you any money and reduces the available funds that could be invested in other opportunities. In addition, it would take a lot of money to pay off a twenty-year loan early. On the other hand, paying the small monthly payments according to schedule will free up extra money to put into other investments.

These are just some specific situations that recent college graduates will face post-graduation and some of the opportunity costs associated with each. You can probably think of many more situations and the associated opportunity costs that will apply in your own life. In the end, it all comes down to what works best for you based on your current financial situation and where you hope to be in the future.

Joe Haviland is an MBA student at West Chester University. He currently works for the US Navy as a Contract Negotiator.

By Joe Haviland
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