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Time Value and Potential Income: Understanding Opportunity Cost

Time Value and Potential Income: Understanding Opportunity Cost

With all the recent coverage and attention inflation has been getting lately, it’s no secret inflation is a growing concern for many. The cost of everything is up, and the supply chain is still facing issues.

If you are like a lot of Americans right now, these conditions may have you exploring how to earn more income so you don’t have to sacrifice your financial goals (or your vacations) in order to preserve your cash flow. Maybe you put more hours in at the office, maybe you put more time into marketing your own business, maybe you off load some property or cars while valuations are sky high. But such considerations beg the question, “What is your cost of happiness?” “When is enough, ‘enough’?”

In the search for more—to earn more, to live an enhanced lifestyle—we must stop and ask ourselves, when is enough “enough”? In other words, when does the cost of the work outweigh the income earned from it?

How much extra would you work to double your income? Triple it? What is your breaking point?

What’s the Opportunity Cost?

The thing to consider when trying to reach this conclusion is the cost of what working longer hours would be. Putting in more time could result in your missing your kid’s soccer game or not being able to take time away to enjoy the vacation you planned well in advance. This is called opportunity cost.

Simply stated, opportunity cost is the cost of a missed opportunity. It is the opposite of the benefit that would have been gained had an action not taken, been taken—the missed opportunity. In these examples, earning more income cost you meaningful moments like the soccer game or the family vacation.

What’s ironic about this example—but is also true for many people—is that we work longer, harder hours for more financial freedom. But sometimes in seeking that financial freedom, we miss out on the very things that are most important to us. Maybe you’re working harder so you can take more vacations, but the time you must put in to earn them keeps you from being able to actually take them. In this case, is the extra work really helping you accomplish your goals?

The Tipping Point Can Change

In all fairness, the question posed earlier about your breaking point was probably a bit unfair. You see, the tipping point can change, not just from person to person, but within the same person at different stages of their life.

If you are at a time in your life when you’re trying to accelerate progress toward a certain financial goal (funding a 529, buying a vacation home, etc.), you might be willing to sacrifice more of your personal time to make headway toward that milestone. You know your efforts will likely be short-lived and could put you well ahead of your current situation. Missing a few soccer games or family dinners over the next six months might be worth the sacrifice.

But, if you are at a time in your life when you are on-track or ahead of schedule with your financial goals, then the tipping point may be a little lower. Without such a great extant need to accelerate progress, you may be more protective of your time. Drawing clear boundaries around your personal time may actually be needed to ensure you don’t let overworking creep up on you and cause negative repercussions in your life.

The Value of Your Time

Ultimately, the questions are a matter of the value of your time—not just the dollar value, but the personal value, as well—and this can vary at different stages of your life.

How much is your time worth right now? What is your current breaking point? At what time limit does the opportunity cost outweigh the financial gain? These are questions you need to ask yourself and figure out as you start to consider taking on more.

And no matter who you are, remember to take a deep breath. Inflation won’t always be at this record-high level, the real estate market won’t always be this hot, and the auto industry will have supply catch up to demand.

In the meantime, if you need help looking at your overall financial health and coming up with a comprehensive plan for all your life’s needs, let’s chat. Schedule a consultation with one of our expert financial advisors today.

 

 

 

 

More About the Author: Sheena Hanson

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