There’s little doubt that clipping a few coupons or baking your own bread can save you money.  But is there a point at which the time and effort involved outweighs the potential cost savings?  There certainly is. 

In economics, there’s a concept known as “Opportunity Cost”, which refers to the value related to the decision to not make one product in favor of another; and is probably best illustrated with a simple example:

Let’s say that you’re handy around the house, and you have the choice of spending your time in one of two ways:  On one hand, you can spend an hour to bake two loaves of bread that will save you $4 over the cost of buying bread at the supermarket, or you can spend the same amount of time to build a knick-knack that you can earn a $10 profit on when you sell it at the local craft fair.  Which choice do you make?  Well, if you look at it purely from the point of view of trying to maximize your economic gain, then you will spend your time building the knick-knack so you can pocket an extra $6 above and beyond what you would save by baking bread.

The same concept applies to the choices we make in our own lives.  Time is a fixed commodity; and we can make choices about how we choose to spend it.  On one hand, you can consider the value of your own time relative to how you spend it; and on the other, you can weigh the value of each potential task as a means of prioritizing your time. 

Let me illustrate each approach…

The value of your own time:  Let’s assume for a moment that you are a software engineer and that you make $60,000 a year.  At that salary, the value of your time (as assigned by your employer) is about $30 per hour.  Knowing what your time is worth, you could conceivably use that as a baseline to decide when to take a task on or when to outsource it.  So, given the choice of whether or not to bake bread, you may decide that saving $4 per hour simply isn’t worth your time.  But on the other hand, if you have the opportunity to spend 2 hours repairing your car, but will save $200 in the process, then it probably makes sense for you to do it, since your effective savings will be $100 per hour.

Prioritizing your time by value:  if you are like me or a lot of other people, then you probably have a “To Do” with dozens of tasks on it that you plan to do at some point in time.  One approach I use to help priortize my time is to assign a value to the task.  By doing so, your task list might look something like this:

• Replace 10 light-bulbs with fluorescents (1 hr – potential savings $420)
• Call around for cheaper car insurance (2 hr – potential savings $250)
• Rebalance 401(k) (2hr – longer-term earnings in the thousands)
• Bake bread (1 hr – potential savings $4)

With this information, you can make better decisions about how to most effectively spend your time in order to maximize your economic gain and grow your wealth.  In this example, I would probably prioritize the rebalancing of my 401(k) as the first task on my list, as the potential gain is quite large and then follow it with replacing the fluorescent bulbs.

Everyone’s situation is unique: Each person will value a task in a different way…Someone, for example, may place higher value on freshly baked bread because they love the flavor and want to avoid the preservatives found in store-bought bread.  However, by understanding the concept of “opportunity cost” and how to apply it, you can make better decisions about how to use your time.

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