Separate money you have 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 and given up most of his weeknights. Now, halfway through, he has realised it is not the field he wants to work in. Finishing would cost another S$4,000 and another year of evenings. When a friend asks why he doesn't stop, he says, "I've already put three thousand dollars into it."
A sunk cost is money or time you have already spent and cannot get back, whatever you decide next. Kelvin's S$3,000 is sunk because it is spent whether he finishes or stops tomorrow. His eighteen months of evenings are sunk too. Time you have already given up counts the same way money does.
A sunk cost is the same under every option, so it cannot help you choose between them. A cost has to differ between choices before it can tell you which choice is better.
Sunk costs still feel heavy. Walking away feels like admitting the money was wasted, and continuing feels like rescuing it. Continuing doesn't bring any of the money back. It only adds more cost on top. Carrying on with something mainly because of what you have already paid is called the sunk cost trap.
The trap shows up in many places:
a course a car you no longer need but keep because you are "four years into the loan" an old insurance policy that no longer fits your needs but stays 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
The past payments are real and may have been painful, but they are irrelevant to the decision you face now.
Leaving them out does not mean you should always stop. Continuing can still be the right choice. It only means past payments should not be part of the reasoning.
The right comparison looks only forward. For each option, list what it will still cost from today in money and time, and what it will still give you.
For Kelvin, continuing means S$4,000 more and another year of evenings. At the end he has a diploma in a field he no longer wants, though it may still have some value on his CV. Stopping means no more fees and his evenings back. It also gives him the chance to put the S$4,000 and the time into something closer to what he wants.
Lesson 7.1, "Every dollar spent is a dollar not doing something else", introduced opportunity cost. Kelvin's future S$4,000 has an opportunity cost, since he could still spend it on something else. His past S$3,000 has none, because it can no longer be used for anything else.
The decision is still his. He might decide the diploma helps him after all, but now he is deciding on the right numbers.
Costs that happen only if you leave are not sunk. They are future costs, so they count.
Siew Ling has an insurance savings plan (figures made up for the example). She has paid S$4,000 a year for five years, so S$4,000 x 5 = S$20,000 in total. If she surrenders the policy today, the insurer pays her S$15,000. Surrendering early usually returns less than the premiums paid. The amount the insurer pays when you end a policy early is the surrender value.
The S$20,000 is sunk, and she cannot get it back whatever she does. The S$15,000 is a real figure about the future: it is what she receives if she leaves now. If she stops, she gets S$15,000 today, her premiums end, and whatever cover the policy gives ends too. If she continues, she pays S$4,000 a year for the remaining years and gets cover along the way. At the end she gets the maturity payout, which is the sum insured plus any bonuses built up over the years. Those bonuses are not guaranteed, because they depend on how the fund's investments perform, how many claims the fund pays out and the expenses it incurs. The Life Insurance Association Singapore (LIA) explains these terms on its website.
To compare the two, she needs the current surrender value and the projected maturity value from her insurer. She should also check whether she could get similar cover again at her age and health.
The gap between what she has paid and the surrender value is S$20,000 - S$15,000 = S$5,000. It may feel bigger than anything else in the decision, but she loses it either way, so it stays out of the comparison.
A car loan works the same way. Instalments you have already paid stay out of the sums. Any charge for settling the loan early goes in, because you pay it only if you leave. Your loan agreement explains how the early settlement charge is worked out.
Write down each option you have. Under each one, note what it will still cost from today in money and time, and what it will still give you. Leave out everything you have already paid, money and time, because it is the same under every option. Include exit costs that happen only if you leave, such as a surrender value you would receive or an early settlement charge you would pay. For insurance, get the current surrender value and the projected maturity value from the insurer, and check whether you could get similar cover again at your age and health. For a car loan, check the agreement for how the early settlement charge is worked out. Then compare the futures and decide.
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 have already put in. List only the future costs and benefits of stopping, then of continuing.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).