You will be able to separate money already spent from the choice in front of you.
Kelvin signed up for a part-time diploma eighteen months ago. He has paid S$3,000 so far and given up most of his weeknights. Halfway through, he knows it is not the field he wants to work in. Finishing will cost another S$4,000 and another year of evenings. When a friend asks why he does not stop, he says what most people say: "I've already put three thousand dollars into it."
That sentence sounds like a reason to keep going. This lesson shows why it is not one, and what to look at instead.
A sunk cost is money or time already spent that you cannot get back, whatever you decide next. Kelvin's S$3,000 is sunk. If he finishes the diploma, the S$3,000 is spent. If he stops tomorrow, it is equally spent. No choice he makes now changes it.
Because that S$3,000 is identical under every option, it cannot help him choose between them, and the same is true of the eighteen months of evenings he has already given up. A cost has to differ between your choices before it can tell you anything about which one is better.
The trouble is that sunk costs feel heavy. Walking away feels like admitting the money was wasted, and continuing feels like a way of rescuing it. But continuing does not bring the S$3,000 back. It only adds S$4,000 and a year to it.
The sunk cost trap is carrying on with something mainly because of what you have already paid. It shows up in a few familiar places.
A course, like Kelvin's. A car you no longer need, kept because you are "four years into the loan." An insurance policy you took on years ago that no longer fits your needs, kept because "I've paid so many premiums already." A gym membership, a renovation that keeps growing, a share you hold because selling would mean taking a loss on paper.
In each case the past payments are real and they hurt. They are also irrelevant to what you should do now. That does not mean you should always stop. Kelvin may decide the diploma still helps him. The only point is that the S$3,000 should not be part of the reasoning.
The right comparison looks only forwards. Take each option in turn and write down what it will still cost you from today, in money and time, and what it will still give you.
For Kelvin, continuing means S$4,000 more, a year of evenings, and a diploma in a field he no longer wants, which may still have some value on his CV. Stopping means no further fees, his evenings back, and the chance to put the S$4,000 and the time into something closer to what he does want. Laid out like that, the decision is his to make, but now he is making it on the right numbers.
This is also where lesson 7.1, Every dollar spent is a dollar not doing something else, comes back in. The future S$4,000 has an opportunity cost. The past S$3,000 does not, because it can no longer do anything else.
There is one important catch. Some costs only happen if you leave, and those are future costs, so they count.
Take an insurance savings plan, with figures made up for the example. Siew Ling has paid S$4,000 a year for five years, S$20,000 in total. If she surrenders the policy today, the insurer will pay her a surrender value of S$15,000, because early surrender usually returns less than the premiums paid. The S$20,000 is sunk; she cannot get it back by any route. But the S$15,000 is a real figure about the future: it is what she receives if she leaves now.
So her comparison is between two futures. Stopping gives her S$15,000 today, ends the premiums, and ends whatever cover the policy gives. Continuing costs S$4,000 a year for the remaining years and gives her the maturity payout, part guaranteed and part not, plus the cover along the way. To compare them properly she needs the current surrender value and the projected maturity value from her insurer, and she should check whether she could get similar cover again at her age and health if she gave this up. She may feel the S$5,000 gap between what she paid and what she would get back more than anything else on the page, yet she loses it whichever way she goes, so it stays out of the comparison.
A car loan works the same way. The instalments you have paid stay out of the sums, while any charge for settling the loan early goes in, because you pay it only if you leave. Your loan agreement explains how that charge is worked out.
Most people have at least one thing they keep paying for partly because they have paid for it before. The useful move is to cover up the past payments, write down only what is still to come under each option, and see whether the answer still looks the same.
Think of something you keep paying for partly because of what you already put in, and list only the future costs and benefits of stopping versus continuing.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).