Cost of money

The cost of money, also known as the opportunity cost of money, is the value of the next best alternative that must be given up in order to acquire or use a certain amount of money. It is the return that could have been earned if the money had been invested in an alternative investment. The cost of money can be expressed as an interest rate, such as the Federal Reserve's target interest rate, or as a percentage of the investment's return.

Cost of money examples

Some examples of the cost of money include:

• Interest rates on loans: When borrowing money, the cost of money is the interest rate that must be paid on the loan.
• Return on investment: If an investor is considering investing in a stock, bond, or other financial instrument, the cost of money is the potential return that could be earned if the money were invested elsewhere.
• Inflation: The cost of money can also be thought of in terms of inflation, which represents the loss of purchasing power over time.
• Foregone income: the cost of money can also be thought of as the income or profit that could have been earned if the money had been invested in another venture or opportunity.
• Lost opportunity: The cost of money can also refer to the value of a missed opportunity, such as not investing in a profitable business venture because the required funds were not available.

References

• Barnett, W. A. (1978). The user cost of money. Economics letters, 1(2), 145-149.
• Faber, J. W. (2019). Segregation and the cost of money: Race, poverty, and the prevalence of alternative financial institutions. Social Forces, 98(2), 819-848.
• Somers, H. M. (1954). Cost of Money As the Determinant of Public-Utility Rates. Buff. L. Rev., 4, 289.