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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