Your time opportunity cost

Published on Dec 13, 2019

We tend to underestimate the opportunity cost of our time

I’m a frugal person. I hate spending money that I don’t need to spend. I’ll build things in my garage, cook exotic food at home, and generally make my life more difficult all in the name of saving a few bucks here and there.

I’ve recently realized my frugality might be saving me money in the short-term, but it’s probably costing me both happiness and money in the long-term.

The reason is my time opportunity cost.

Time is our most limited resource. When you choose to spend time on something, that’s time you’ll never get back. And more importantly, that’s time you could have spent working on something else.

Over the last few months, I’ve forced myself to be more lax around spending money if it saves me time. And wow, it’s made a world of difference in both my happiness and productivity.

Even building this blog can add stress to my life. It’s something I do outside of work, which means I have limited time to do it. If 2017 or 2018 Zack were in charge, he would have stayed up late every night for a week or two pounding out features.

But 2019 Zack is smarter than that. He knows that his unique thoughts and creative visions in his head can only be done by him, but that most software can be done by tens of thousands of engineers around the world.

During the course of building this blog, I found a few good UpWorkers and farmed out a significant amount of the work. It’s probably saved me a few dozen hours of work and cost me only a few hundred dollars. Could I have done it myself? Sure. But I judged that the opportunity cost of my time was more valuable than the cost to delegate some of the repetitive work.

This theme ties closely into my thoughts on delegation.

Another current example is that my wife is traveling to Chicago next week. Normally, I’d drive her to the airport and pick her up. It takes at least an hour driving each way and costs $20 per round trip in tolls. If you add it all up, it costs me $40 + gas in addition to 4-5 hours of my time.

There’s a service in the Denver/Boulder area called GreenRide. For $45 each way, they’ll shuttle you to and from the airport directly to your house. So for $90 I get to stay at home working while my wife gets picked up and dropped off at our doorstep.

Sign me up.

How do you calculate opportunity cost and determine if delegating is worth it?

Spending a few hundred dollars polishing up my blog is worth the cost, but would a few thousand be? Tens of thousands? At some point the time delegation saves me isn’t worth the cost.

Opportunity cost is different for every person and every circumstance.

My method for calculating opportunity cost is simple:

  1. I determine how many hours of work the task at hand would take me to complete.
  2. I consider what I’d do with that time if I delegated the task to someone else.
  3. I come up with a sticker value for that time. This is my opportunity cost.
  4. I investigate how much it will cost to delegate.
  5. If the cost to delegate is less than the opportunity cost, I delegate. Otherwise, I do it myself.

There’s definitely some art involved in these calculations. Sometimes it’s hard to put a dollar value on abstract benefits like saving you stress or giving you more time to spend with your family. I’ll leave those cases up for you to decide.

If you plan to use the time you save via delegation working on something with economic value, calculating opportunity cost is fairly straightforward. It’s simply your hourly wage multiplied by the number of hours you’ll save.

So if you make $100k per year, that works out to close to $50/hr wage based on a 2080 hour work year.

If you were in my situation and were faced with either spending 4-5 hours driving to and from the airport or paying $90 to have someone else do it, the math is easy. 4-5 hours multiplied by $50/hr is $200-250 opportunity cost. GreenRide is $90, which is far less than your opportunity cost.

There are other factors you should consider. While I might save 4-5 hours of time using GreenRide, I also don’t get to personally drop my wife off at the airport, which has utility that’s difficult to quantify in dollars. On the flip side, driving in traffic would be would be stressful and avoiding it has health benefits for myself.

One of the most important distinctions to recognize is that when you calculate your opportunity cost, you need to decide what you’d do with the time you save through delegation. If you’re going to sit and watch TV, you can’t use $50/hr as your opportunity cost because you aren’t workings and creating value at a rate of $50/hr.

It’s easy for delegation justified by opportunity cost to become a slippery slope, so be pragmatic and realistic.

When you understand how to calculate and apply opportunity cost, you’re productivity can increase by orders of magnitude. Be frugal when it makes sense, but don’t be afraid to invest in yourself.

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