Monday, July 30, 2012

Opportunity Cost

Since the last Less is More post, I have thought a lot about why I do what I do (in terms of organization, healthy eating, simplifying life).  It reminded me of a principle my husband shared with me a few years ago, something I had learned in one of my undergrad ecomonics classes: opportunity cost.

Ted, my husband, went to a class at Columbia University that was taught by a mentor of his.  In the class the professor of business explained more about opportunity cost.  Ted had to explain the basics of the principle to me before he could go into depth about the class.  Opportunity cost is a way to measure the cost of any given activity against another activity.  The professor in the class used this example:

Let's say your mother's birthday party is tonight, but you have to do your laundry and there is no way you can put either off.  How much would you pay someone to do your laundry in order for you to go to your mom's birthday party?  $20? Yes. $20? Yes. $30? Yes $40? Yes $50? Probably $60 No way.  There you have your opportunity cost of going to the birthday party, about $50.  Each person would have their own opportunity cost depending on their own individual circumstances.

I have had several people ask me why I have to have a cleaning lady come once a month.  Isn't my job as a real estate agent flexible?  Aren't I home most the days?  Then why pay someone to do something i could do myself?  My answer is opportunity cost.  For me to scrub the tub, clean the rest of the bathroom, vacuum and deep clean the house, there is a high opportunity cost.  I would be willing to pay for this.  Because of my disease, if I did all the previously mentioned things on my own, I would have to rest for an entire week to regain my normal strength and stamina, so for me the opportunity cost is a lot higher than someone else.  My time is better spent doing my real estate to earn money to have someone clean (since it is mostly computer work) or doing our laundry since it is a start the machine and leave it for awhile activity that I can manage with my health.  

Everyone has different things that they can use to figure this principle out.  

Another example in my life is seen how some people think Ted and I are crazy for how strict our diet is and how much more we spend on our groceries since we eat healthy.  We count every calorie, not only that but due to medical conditions we have to eat mostly sugar free and fat free (ugh), which makes food more expensive.  Since we have both been eating healthy we have had to increase our months grocery bill. (Although with a few tricks of the trade we still only spend $250 every month on groceries, eating very healthy...stay tuned later this week for some ideas.)  Some people wouldn't think this is worth it, but to us it is.  We know that if we spend the money up front now on our food and get healthy and stay healthy, it will prolong us from getting sick when we are older and actually end up saving us a lot of money in medical and pharmacy bills in the coming years.  For for us we are willing to pay the price now for a future goal. 

The truth is we can all use the principle of opportunity cost to better our lives.  What can you cut out?  What can you pay someone else to do that will free up time or energy to do what you hold as higher priorities?  What do you want to do that you have never done before?  Figure out what the opportunity cost is for each thing you just listed and make it happen!  No time to change like the present!  

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