Thursday, March 22, 2012

Evaluating opportunity cost: Why I don’t do couponing

 I have two coupons in my purse and two stapled in my planner right now. That is actually a lot more than I usually have saved. I love the IDEA of couponing, and I love the thought of getting 49 tubes of toothpaste for only  $.11, but I don’t have the time or the desire to sit down, clip or print coupons, match them with sale ads, and then go to different stores. And I have no need for and no place to store bulk items. For me, couponing is a matter of opportunity cost, and the cost is greater than the benefit for me. 

I am by no means an economics scholar, but one of the lessons from high school econ that has had a profound impact on my life is the idea of opportunity cost.

According to The Economist, Opportunity Cost (also known as shadow cost) is the true cost of something. It is based on the idea that you must deduct the price of what you give up from the price of what you gain to discover something’s true cost.

Let me give you an example...

If I spend 1 hour in the kitchen making homemade tortillas, for those tortillas I am actually paying for:

1) The ingredients
2) The equipment I used to make them, including utensils, cookware, the ingredients, electricity and water.
3) An hour away from my son, or an hour that I could be doing other (probably more pressing) things.
Or I could buy a pack of tortillas for $.99 at Aldis.
In this example, which I got from the Money Saving Mom, making my own tortillas is not worth my time if the only benefit is having homemade tortillas.
But, if I also get the enjoyment of cooking from scratch, the satisfaction of knowing exactly what goes in my family's food, the enjoyment of cooking with someone I care about, etc, the the opportunity cost could come out on the positive end.
The formula for opportunity cost is simple:

      What is gained
-      What is spent in the process
=     The true cost of something*

*What does this number tell you? Is the monetary value enough to justify the work? Are the emotional benefits great enough to offset other lost opportunities?

Opportunity cost is something that is individual to you, your family, your priorities, and your life.  

Only you can decide if something is worth your time. And is is for precisely this reason that you MUST actively consider the true cost of an item or an activity in terms of what your needs and wants are.
Some of the things that have a positive opportunity cost for me but probably not a lot of other people are:

1) Driving an hour to work. This has a positive opportunity cost because I have an excellent opportunity with my foot in the door at an amazing school. Also, I live far enough away from my students that awkward social encounters are avoided, I live very close to my family, and I enjoy the hour in the morning to gather my thoughts, relax, and listen to audio books.

2) Being a vegetarian. This is a LOT of work. It makes going out to eat frustrating and causes problems when I want to cook for friends who have other dietary needs. Ultimately the cost is lower, because meat is expensive, but I also have the benefit of knowing that I am doing something that is very important to me.

3) Sending my son to private school (well, when he gets old enough to go to real school he will go to private school.) I teach at a private school and have taught in public schools.  Both my son’s father and I went to private schools for part of our education and public schools for part. The difference is something that is far beyond faith or class size, and that difference is very important to us.
The school I currently teach at costs $25,000 a year to attend. The school I attended costs $3,000 a year. There are many options and finances will definitely be a part of us deciding where to spend our son, but the answer will absolutely positively be some sort of private school.

4) Freelancing for a content mill. Okay, this is a complex subject, but to get some background on the topic visit Freelance Switch. I know that this is not a huge money making opportunity, but I also know that it is a chance to get myself out there and to hone my writing skills. Everything is that you make of it, and I see this as an opportunity for me to grow. The low financial return I expect is balanced by the experience I will gain and the fact that I enjoy writing.

5) Living with my mother. I live in a house that my mother owns. Three years ago my sister and I rented it from her because she was not living in it. 17 months ago when my son was born my mother came to stay with me “for a week” and never left.

I am adult and a parent myself, and my mother has some very different ideas of what an acceptable level of clean and organized living looks like. It is stressful, but it has made me much closer to my mother and sister, it has allowed me to help my mother through some medical problems, and it has allowed me to have other adults in the house to help with my son. This has been an interesting situation that I would say has definitely been an overall positive experience despite the stress it also causes.

All in all, opportunity cost is all about what is really important to you. It requires you to make decisions based on what you have already established as your priorities. It also assumes that you already know what some of your priorities are.

What are some of the things that make sense for your family that wouldn't necessarily have a positive opportunity cost for others?

No comments:

Post a Comment