Time Value of Money & Opportunity Costs — In Real Life

A few weeks ago I was chatting with a co-worker as he was washing his Tupperware in the sink of the office kitchenette. He mentioned that as a way of saving money, he brings his lunch to work and typically eats at his desk. He spends roughly $5 per day on lunch, whereas I spend $11 when I visit the bistro at the hospital’s heart center for a hot, nutritious meal.
His argument: Why pay more for food?
My counter-argument: After he spends time in the morning preparing his meal, planning his workday lunches in advance, lugging a cooler around, washing the containers¬†and losing the chance to escape from the office for an hour or so … he may be paying less in raw dollars for his mid-day meal but his hidden costs are much greater.
People often fetishize their dollars at the expense of their sense. Lacking an appreciation for the time value of money, they will hunt for low gas prices and drive 30 minutes round-trip out of their way to save a total of $2 on a fill-up, not realizing that if they thought about things rationally, that they are basically saying their time is worth $4/hour.
To be sure, some people have so much unproductive slack that the whole point of opportunity costs is moot; when you don’t do anything of significance for big chunks of your day, spending time to save a dollar here or there does make a degree of sense.
But for people who are otherwise occupied with tasks, clients and the like, every minute spent in the pursuit of a marginal cost savings must be weighed against its opportunity cost — that is, the cost of the next best alternative. If you are a freelance writer, for example, does it make more sense to waste 30 minutes to save $2 in gas, when you could use that 30 minutes to write an article that pays $15, $20, or $25 in the long run?
Time is a commodity like any other. When you invest your time in low-risk but low-reward activities like bargain hunting, with its associated immediate payoff, you may be saving a little today but foregoing the benefit of earning more tomorrow.
From my perspective, I’m glad to pay a daily $6 premium on my lunch because I like the taste of the bistro food, I get out of the office, I don’t need to worry about planning ahead, and I don’t need to lug a lunch tote or wash dishes later. The time and hassle of eating a “home lunch” just isn’t worth it, so I look at the $6 as a fair trade for the added enjoyment and convenience of the experience. In exchange, I get non-tangible benefits at work (like leaving my desk) and can use more time in the evening writing or reading or engaging in long-term self-improvement projects instead of worrying about tomorrow’s menu.
People make odd choices sometimes. If more people grasped the pillar economic concepts of opportunity costs and the time value of money, perhaps productivity would improve and overall contentedness would rise.

You may also like

1 comment

  1. The “time value of money” does not mean what you describe here. The economic definition is basically that getting a dollar today is worth more than getting a dollar a year from now, because you can invest that dollar and gain interest from it.
    Driving around looking for cheaper gas does not demonstrate the time value of money, but rather the “money value of time.”

Offer a witty retort.

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: