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In a previous post I brought up the concept of opportunity cost. The idea is that time can only be spent. Frankly, people waste most of their time either relaxing or being unproductive. I like the idea of telling people about how time is precious and you should be productive with it, including recreation. However, there is a selfish and severely misguided side of opportunity cost in which people are trying to justify unnecessary luxuries.
In this post I want to clarify the concept of opportunity cost to you so you do not make mistakes in the name of building your finance.
Your Time May Not Be Worth As Much As You Think
One of the most common claims on how much your time is worth is by determining how much you are paid per hour for your job or your efforts. For instance, a lawyer could make $260/hour and taking a gig on TaskRabbit could earn you up to $70/hour. Both of these sound good. If you work 40 hours a week 52 weeks a year, that would be $540,800 and $145,600 a year respectively. In reality, the mean salary of a lawyer is $98,150 in 2018. As you can probably see by the distribution chart from the link, the mean is not accurate to what most lawyers are paid. As for TaskRabbit, according to Entrepreneur.com, the average monthly pay is $110 per month, annually that would be $1,320.
That is considerably lower than expected because while your time may have a high price, it only has value when people actually pay for it. The rest of the time is spent attempting to win clients who see your time as something worth spending their hard earned money on. It does not matter how much you have been paid before, you only make money when people pay the price.
“I Made Over $1,000 In One Day”
You have probably heard this phrase is advertisements or even from people with high quality financial advice. They say things like this to convince people that their business has made them rich and valuable. Let me say this. This is not a difficult accomplishment, in fact I have accomplished this over a dozen times in my entire life. This has happened when my portfolio received dividends and rises in value from random above average days in the market.
In fact, I once made over a thousand dollars in two hours. I went hunting for deer, first time I went I downed a buck during the second hour. The average price for the meat on a single deer ranges from $1,250 – $2,500 depending on size and quality. My deer did not have size, but it had quality so I can only give you that price range. Of course I did not sell the meat. In PA that would be illegal, at least on the commercial level. There are people who sell things like small deer jerky batches to family and friends which do not count as commercial sales and may be allowed (legality is still in question though).
Either way, the meat we obtained was very high quality and healthy. Not only did me and the missus not need to buy meat for two months, but the meat was very high in nutritional quality for our long-term health. You cannot put a price on that.
Time Is Not Guaranteed Money
The point is, if you plan ahead and take risks, you will have many days in which you made about as much money in a single day that the average person makes from a single biweekly pay period. What about the remainder of the days? Much like the gigs, you will only have some certain times in which you have a good pay day. In fact, if you take risks, you will lose money. I once lost almost $5,000 in December 2018 from the same portfolio that raised my net worth by over $1,000 several times in a single day. Like it or not much of wealth building is planning, strategy, determination, interpretation, reaction, and some luck. You will never have full control of your wealth and your time will never guarantee any money.
What Opportunity Cost Actually Means
Time is valuable, but it only has a price when people are willing to buy and sell it. I know people who refuse certain jobs because “the wage is not worth my time.” Unless those same people have some other job or business in which is paying them better, this argument is invalid. Like J. Cole rapped in his song Mr. Nice Watch: “They say time is money, but really it’s not. If we ever go broke girl, then time is all we got.” I never thought I would use rap lyrics to exemplify a point in finance that is hard to explain, but these lyrics make excellent points.
To explain his point further, time is not money when that is all you have. Technically speaking we always have time, unless you work 24/7 (I promise you, you do not). The concept of opportunity cost is that you can only spend your time on, at most, a few things and if you want to make any money from your time, you will have to take it from something else in order to make money.
Let’s look at the same person who refused the job because “the wage is not worth my time.” Let’s say they have no job or earning prospects that require their immediate efforts. They decided their time was better off not working the job and doing something else that would not earn them money. This could be because of laziness where they are watching TV. It could also be for priorities such as taking care of a loved one. Either way, they decided the wage was not worth their time. This may be unwise is they need money more than extra time. But let’s say the person has another job or business that requires their time because of potential growth. It may be wise to refuse to spend the time for a little extra money.
Time Is Valuable, But Not Intrinsically
It is better to think of opportunity cost as this. Time is valuable, and you should put it where it matters. But time has no price, no one can accurately tell you how much your time will cost. Even stable salaries agreed by contract are not 100% accurate, the taxes taken out can change at anytime. So even the most accurate agreements of selling and buying time for money can change at any moment. It is far better to put your time to give you more value than to determine where you should put your time to get more money. But then why do so many people recommend trying to find where you can put your time to get more money?
Watch For Hidden Ads
I noticed that many people who talk about opportunity cost bring up many individual companies that can help you “outsource” your work. For instance, TaskRabbit can outsource almost any free lance work. Even iBuyers can help you sell your real estate with less hassle than traditional agencies. This sounds like a dream come true.
What service do you know that is free though? If you expect anyone to provide you with these services, you will have to pay for it. How are such services justified? By saying that the money you get from your own work or business provides you with more value that what you would save by doing the service. Or at least that is what many financial advisers recommend.
In many situations, financial advisers who recommend outsourcing are being paid for advertisement. Whether this is just for money, or an actual recommendation (with the side goal of making money) is questionable. For instance, one of my favorite personal finance blogs, Financial Samurai, recommends that you should hire a home chef, go out to eat, and only cook sparingly. They claim this all in the name of saving time. But then they advertise using a credit card when you go out to eat. It’s a secret advertisement.
Normally, I would be ok with that. But they recommend using your business/employer as a piggy bank. That is terrible advice, they are saying that you should eat out as much as possible on your employer’s salary. Also, I am not a lawyer, but I think if you order more food than necessary and take the remainder of the food home, that is illegal. If the money spent on a business meal is tax deductible, then spending any extra money on anything not eaten at the restaurant may be fraud according to the IRS. At the very least, take the advice from Financial Samurai’s blog with a grain of salt.
The Ugly Truth
I think that opportunity cost is constantly brought up by financial advisers because it is an excellent platform to sell some services. In all fairness, they are not wrong. Simply put, you cannot do everything yourself. When I made Forge Your Wealth I asked my wife to edit my posts and to help give me ideas of what to write because every time you create content, it is better to get at least some criticism.
I know many people who have to hire others to do work like that. I do intend to do that more in the future. For instance, I want to pay for a service to provide high quality photos. The reason why is because the free photos are occasionally illegal and sometimes people find that if they do not pay for a photo service, they may have to pay for lawyers. Spoiler alert: paying for the photo service is almost always less expensive. I have linked 123RF because of their excellent and affordable plans. I am not being paid by them as of this moment to tell you about it, but to show you an excellent service for obtaining legal photos.
By paying for the service, not only would I pay for high quality photos, but for legal outsourcing. If, for any reason, the photo I download from a service I paid for is illegal, I may be asked to take the photo down. But the service said they own the photo and it is fully protected by the laws of copyright, etc. If that is not the case, the legal ramifications fall entirely on them. The ownership clause addresses that.
I may even hire other people to write or to do other things for forge your wealth, especially if I work towards other enterprises.
Time is valuable, but it is not necessarily money. You can focus your efforts into trying to make money, but at the end of the day, there is no guaranteed intrinsic value for your time. That does not mean that you should waste your time on only entertainment, you could use that time to lay out a foundation for something productive. At the same time, do not think any time not spent on something that would make you money is not productive. Recreation is a necessary aspect in life.
There is far more than one value in life, and if you ignore all values except money, you will likely feel empty. I swear there is a classic Christmas tale about that. The idea of this post is to show that time should be used to improve your life, not to tell you to chase your greed.
Your time has no more intrinsic value than anyone else’s. Do not act like they should work around you or bow down to you asking what your desire is. I know many who say that their time is more valuable than others. People who say that frequently find that the people whose time is “less valuable” than theirs are less willing to be clients for someone who is outwardly arrogant. If you do not have clients, you do not have money, and the intrinsic value for your time disappears.
Time Is Power Meant To Be Harnessed
Time is not a supervisor that tells you how much you should be paid. It is a resource you can use to increase value in multiple areas. Use time wisely, but do not forget, time is a resource you cannot fully control, you can only focus it. Like the heat from a flame. Heat will go everywhere, unless it is focused. But even then, you can never capture its full potential. Time is a resource you can use to forge your wealth, but never forget that it is a power you can never have full control over. All you can do is try to harness this power to try to produce something of value. By itself, time is a power with no intrinsic value.