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Sunk cost is a terms often used in management accounting that assist business when making critical decisions. Simply put, it is money already spent and cannot  be recovered . In other words those are irrelevant costs that you should be ignoring when making a decision.

Let us take an example – You are moved in an apartment that costs you  N$ 2500 per month for rent. This apartment is in a good neighborhood and apartments in that area are normally rented out for N$3200 per month. As such, your landlord charged you a N$2000 non refundable deposit when you moved into the flat.

Just a few month down the line, you find out that actually despite the rent being low, the place is far from work and you have to spend twice in fuel costs when comparing to the previous place where you stayed. So you are now considering whether to move or not.

In making this decision, you need to be able to know what factors you need to take into consideration when making this decision. For this you should only take into consideration the relevant costs ( i,e only costs that will change with your decision) and ignoring the sunk costs.

In this example, if you move, your monthly rental costs will change as well as your fuel costs depending on the location of the area that the new apartment is. However, whether you stay at the old apartment or you move into a new one, you will not recover the non refundable deposit if N$2000 you paid your current landlord and hence you should ignore that. The deposit  paid and not recovered is therefore a sunk costs.

Not knowing this in life can hinder you from making the right decisions. Sometimes , especially when we make impulsive decision, we tend to spend money that in most cases cannot be recovered, however we often let this sums get in our way when we make future decisions. Know the difference and consider only what is relevant.

What are some of the sunk costs in your life that you need to let go?

Love

Dhalondoka

 

 

 

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