Your Hourly Monetary Opportunity Cost – Intro

In your pursuit to live life optimally it helps a lot to know your hourly monetary opportunity cost. Here I will give a brief description of why this is good to know and how you go about calculating it. I assume you are familiar with the concept of opportunity cost – if not, check it out here.

Many times when you need to get your things done you actually have the possibility of outsourcing it. You can outsource things such as cooking food, doing laundry, cleaning your house and transporting yourself somewhere. You can not outsource things such as making friends, sleeping and having a good time. As most of us live in a market economy, most things outsourcable are available on the market for a certain price. If you find something outsourcable but not available – you might have a business idea (but that’s a whole different story). If you got things to get done in your life, you can’t waste time (simply because passing empty time has an opportunity cost). And whenever you can’t waste time, it helps to be able to make quick and accurate decisions. In having an idea of what your hourly monetary opportunity cost might be, you could easily determine what to outsource and what to not outsource. Let’s look at a simple example:

You work at a company which pays you €15 for every hour you work. You need to do your laundry, which takes you an hour of time during which you otherwise had the opportunity to work. The opportunity cost for doing your laundry is then €15.

In a pure monetary sense, if someone is offering you to do your laundry for €10, and you accept this offer and work instead, you are €5 better off. The opportunity cost of not accepting the laundry offer would then be 5€. Now, in real life two alternatives are seldom different on only a few points, and calculating the true opportunity cost could be very difficult, weighting in all possible outcomes of the alternatives.

In practice, you only need to have an idea of roughly how much your hourly monetary opportunity cost is. Since other costs besides from monetary ones also are prevalent in most choices, knowing that your hourly opportunity cost is €12.75 or guess that it is €15 is not going to make a huge difference. Other opportunity costs for the example above could be emotional recovery/meditation aspects when doing your laundry versus a stressful work environment when working. It could also be emotional stress when doing your laundry versus potential long term careers benefits working an extra hour.

If you work, a good idea could be to make it an average of your hourly wage (noting that hourly wage could differ over the seven days and the 24h). If you are a student, one idea could be to look at expected entry level salary and expected amount of work to calculate expected hourly wage. Then calculate net present value of this and perhaps make it a bit lower to compensate for the possibility of you never getting this job. It’s all up to you, it’s all up to your assumptions. The more accurate your assumptions are the more powerful this tool is. Please note that this is not about you having to know exactly how your future will look like, in the case of a student or similar. It’s about making the best possible assumption under your individual circumstances. If you are a student and have great variance in expected hourly wage, you have to discount it for the fact that the opportunity cost of overspending could be rather high.