Opportunity Cost – How Much is Your Time Worth?
Do you know people who will drive an extra few minutes to buy gas at the cheapest station in town? Or how about people who clip coupons and then drive around town, shopping only at the places where they have coupons? At some level, I admire their frugality. On the other hand, I wonder whether that’s smart. Every day we make decisions to save time by spending more money, or save money by spending more time. This is the concept of opportunity cost, and it begs the question:
What is an hour of your time worth?
Have you ever thought of the opportunity cost of your time? It is very useful to know the value of your time because it enables you to make better decisions. What is the opportunity cost of paying for a direct flight vs. a two-hour layover? What if you could free up time by delegating items on your “To Do” list at a cost of $20 hour, $40 hour, $60 hour, $100 per hour? What is your number?
The answer to this question is not easy. The natural starting point for people who are still working is simply dividing your after tax annual income (including benefits) by the number of hours worked. However, that is just the beginning of the analysis. Then you have to consider whether you have more time than money or more money than time. You should also consider how much you like or dislike the task at hand and what trade-offs you are willing to make. A recent study of over 8,000 people found that:
80% of people value the opportunity cost of their free time at more than they earn per hour.
In other words, most people who make $50 per hour (after taxes) are not willing to give up an hour of free time for $50.
To help you think through the opportunity cost and true value of your time, I found a very cool Time & Money Calculator. It takes about 10 minutes to run through the exercise, but it really helps you think about the time vs. money decisions you are making. The calculator produces a personalized report that points out inconsistencies in your thinking and guides you to making better time vs. money decisions.
Delegate more? It is easier and cheaper than ever to hire people to do just about anything.
Once you have a better feel for the value of your time, you may decide to delegate more, such as hiring a cleaning lady or gardener. The fact of the matter is, it is easier and cheaper than ever to hire people to do just about anything. TaskRabbit and other Virtual concierge services allow you to delegate almost anything from running errands to reorganizing your closet, freeing up your time to create a bucket list of travel destinations or research where you want to have a vacation home. You can also find personal assistants at Fancy Hands or Zirtual, and you can find freelancers who will do anything from custom writing to website design and marketing/consulting at UpWork.
Research has consistently shown that money can buy you happiness, but typically, only when you spend it on experiences and spending time with the people and causes you care about. Hopefully, you can make more time to do the things that make you happiest.