The proverb “time is money” is something we’ve all heard. It’s a quite simple and effective way to explain the concept of opportunity cost, a basic economic concept.
What Is Opportunity Cost?
Opportunity cost works on the fact that resources are scarce. There will always be a limited supply of time, money, or natural resources. Opportunity cost is the value we place on the choices that we make, based on the next best choice that we could have made. The value can be a tangible or intangible benefit.
For example: You have four hours to spare and you have two choices on what to do with that time.
Choice #1 You have been afforded the opportunity to work overtime at your job for the four hours, making $30 an hour, for a total of $120.
Choice #2 You stay at home. You spend an hour doing yard work, and then spend the rest of the time watching TV.
If you chose #1 and worked overtime for four hours, your opportunity cost was that you didn’t get to mow the lawn and relax. An intangible benefit lost.
If you chose #2 and cleaned up your yard; afterward, spending some time rejuvenating, your opportunity cost was that you didn’t get to make an extra $120. A tangible benefit lost.
Basically, when you make a choice, you are giving up the benefits of any other choice you could have made. There is no right or wrong choice. You just have to decide which one works best for you, based on the priorities you value.
Time Is Money
Now that you understand opportunity cost, the phrase “time is money” is easy to understand. We have a limited amount of time, so time is a valuable resource. Most of us will spend the majority of our lives working, thus spending most of our time at work. We get paid for the time that we work, so the amount of time that we spend at works equates to how much we get paid. When we use our opportunities wisely, we spend our time productively and make money. Because of opportunity cost, when we feel like we are wasting our time, we think about how much money we could be making.
Of course, not everything is about making money. Sometimes relaxing or spending time with your loved ones is more valuable and beneficial than making money. The main point here is that we measure time in terms of money.
Do you have an example of opportunity cost that you’ve experienced lately? What’s the biggest gain or loss you’ve had while making a difficult economic choice?