Sunk Costs: Know When To Cut Your Losses

Sunk Costs: Know When To Cut Your Losses

Jennifer Hunter
Feb 6, 2015

I recently learned a new term: sunk costs. This economic principle centers around the idea that once you've paid for a good or service, you have spent that amount, and it's sunk. If you don't like what you've purchased, there's often pressure to continue using it avoid "wasting" that money. Economically, this is ridiculous. The cash is gone whether or not you continue to sit through that terrible movie or hate-wear your itchy sweater. Sound familiar? We do this in our homes all the time!

Picture this: you buy a brand new dining table. Yay! But the first time you sit down, you bump your knee on a weird, sunken ledge beneath the top. And you keep bumping it, every time you sit down for dinner. You paid a pretty penny for this piece so should you suck it up and just reconcile yourself to a permanent bruise on your knee? No!

Sure, you paid a chunk of change for that table, but by keeping something that just isn't working for you, is essentially paying twice. Economically speaking, it makes more sense to let go, even if you paid good money for it. In other words: know when to cut your losses.

Of course the goal is to prevent buying the wrong things in the first place. But mistakes happen, and you can save yourself lots of anguish by identifying your own sunk costs and getting out sooner rather than later because, after you know something is a sunk cost, the longer you wait the harder it is to get out.

Read more about sunk costs at LearnVest.

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