That’s right. Bull. All these experts go on and on about calculating the opportunity cost of something and adding that in to your cost analysis when deciding whether you should do something yourself, or hire it out. Heck, even I have used it before. But, we’ve all taken it way too far.
Let me ask you this; What is your opportunity cost of reading this post? Of eating your breakfast this morning? Not relevant? Bull, again. We use it to determine if we should keep cable T.V. We use it to determine the added cost of our daily commute. Personally, I’ve used it to validate paying people to do all sorts of things. Mechanics? The cost of doing it myself is too great, let them replace those brakes! Plumbers? I hate doing plumbing. Let them fix that leak! We’ve become so obsessed with being frugal and pinching our pennies that we figure out the cost of everything that we do. If the cost is too high, we should avoid doing it, or do it ourselves, our mantra goes. But, that isn’t always true! Sometimes, it’s just straight up bull.
We all want to improve our finances. That’s why we do those calculations. It’s simple mathematics. The problem with opportunity cost, however, is that most people assume a 100% efficiency. I hate to be the one to break it to you, but there is nothing that is 100% efficient. Not you, me, or anything ever created. There’s gonna be some loss. So, yes, I can figure the opportunity cost of my time. But, it depends on my using that time to be efficiently working on something that will make me money. The opportunity cost of my time at work is about $25/hour. But, that doesn’t mean that every hour I sit at home watching T.V. has an opportunity cost of $25/hour. I can’t stop watching T.V. and replace that time with paid time for work. They don’t like paying overtime. Plus, I’m paid on salary, so every extra hour I work at work, reduces the effective hourly pay. Did you catch that? Every hour over 40 hours a week that I work reduces my efficiency to earn money. If I were paid hourly, that might be slightly different. But, I’d be willing to bet, my employer would still have an aversion to paying overtime and would not allow me to work many more hours over 40.
If you’ve got side projects, like I do, there is a opportunity cost for every hour that I’m not working on them. Some side projects are extremely easy to figure the cost of. If I contract out my work on an hourly basis, my cost (for every hour I’m not working that project) is that hourly rate. But, just like my job, I can’t be 100% efficient at my side project either. I’ve got to sleep sometime. (Egads!!! The opportunity cost of sleep!!!)
The point is this; If you’re going to try and figure the opportunity cost in order to validate a decision, don’t do it blindly. Realize that you won’t be 100% efficient. Just because you disconnect the cable T.V. doesn’t mean you’re going to replace all that T.V. watching time with efficient money making time. Some of it might be spent reading a book. Or playing with kids. Or napping. 😉 Each of those may have some benefit to you, but they really don’t have much place in a financial cost analysis. Sorry, you can’t bill your kids for playtime!
The personal finance world is full of stuff like this. Mantras and rules-of-thumb that we use like crutches to validate and justify why we do what we do. It’s like an addiction. If you truly want to take control of your finances and live a better life, you’ve got to discard those addictions like you would a pack of smokes and begin to analyze what you do with a critical view. Nothing is worth using in your finances until you’ve tested and proven that it is.
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Opportunity costs can be more than dollars and cents. For example, you decide to go to the movies versus taking a class. You have a loss, but it is difficult to measure. Choices do not always result in a neat package.
Yes, it’s not all about the money. It’s nice just to have some reckless fun once in a while. But, we all need to decide what to do with our time when (if) we wake up in the morning.
@krantcents, I think that’s key here. Too often, we just look at the dollars and cents and forget that there are other parts to an equation. In this case, the forgotten part is the efficiency of what you do with the time.
@hunter and deciding what we do with our time should be given some though, just don’t forget to remember that it’s not all about the money.
I have really been struggling with time management lately. I just feel so busy and never seem to get ahead. The thought of outsourcing things has crossed my mind. I know time is money but like you said, how far are we going to take that?
Great post.
I agree that I wouldnt get caught up in the so called opportunity cost of sleep or playing with your kids…rather the opportunity cost of spending money on a new car now as opposed to continue driving your old beat up one.
I agree, opportunity cost can be used a little too much. 100% efficiencey is next to impossible unless you freelance by the hour and fill every waking moment with more billable hours.
That said, how bout starting to use a more reasonable % like say, 15-20% opportunity cost for non-sleeping calculations?
Hahaha…great post! Opportunity costs can be so over done. In fact, I calculate my opportunity cost of reading this and commenting at $80. You owe me.
Opportunity cost work if you value your free time; time with your family, time dreaming, time walking in the neighborhood, time catching up with friends. Paying someone $150 a day to re-tile my bathroom on a Thursday allowing me to go for a walk along the river on a Saturday is worth every penny.
As for couponing, its only worth using a coupon if you would buy the item anyway. I used a roll of toilet paper a week. I can get free soap from hotels. A bottle of washing detergent lasts me 3 months. I shop at small local grocery shops and cook most of my food from scratch. My total weekly shopping is no more than $30-40. The time to find, cut and use coupons is a false economy. If you want to save money, go to a market and get some fresh vegetables, a sack of rice and some herbs and spices.
Who needs 150 sports drinks, 45 packs of noodles, 100 rolls of toilet paper?
Maybe if these people had put the same effort into listening at school they could be earning $200K a year and not so worried about the cost of shampoo.