Opportunity Cost: the Freelancer’s Aid for Better Decision Making
Most freelancers are working on a variety of different projects at any given time and are constantly facing a decision between different options, and choosing which projects to take and which ones to pass up can be a daunting challenge.
Most of us typically make these decisions based on factors like the amount of money that can be made, the time the job will require, and our current availability. Obviously, these decisions aren’t always easy.
While the factors of money, time and availability will be major influences on any decision that you make, they don’t always tell the whole story. If you were to pass on a particular job, what would you be able to do with your time, and how would it affect your overall situation? Opportunity cost allows us to see the complete picture.
Wikipedia defines it in this way (emphasis added):
Opportunity cost is the cost incurred (sacrifice) by choosing one option over the next best alternative. Thus, opportunity cost is the cost of pursuing one choice instead of another. Every action has an opportunity cost. For example, someone who invests $10,000 in a stock denies oneself the interest that one can easily earn by leaving the $10,000 dollars in a bank account instead. Opportunity cost is not restricted to monetary or financial costs: lost time, pleasure or any other benefit that provides utility should also be considered. Opportunity cost is a key concept in economics because it implies the choice between desirable, yet mutually-exclusive results.
I remember having opportunity cost explained to me like this: An 18 year old graduating high school can attend a university for a cost of $25,000 per year. However, if he chooses not to continue his education, he can take a full-time job and make $35,000 during that same year. While he is only paying $25,000 to go to school, his opportunity cost would actually be $60,000, because in addition to what he is paying he is also passing up the opportunity to earn $35,000.
Of course, this example doesn’t directly apply to freelancers, and it also doesn’t address the non-financial factors in the decision, but it still should give an idea of the concept.
As a freelancer, you will be constantly passing up on something in order to take a specific job, whether you realize it or not. If you were to turn down the job, what else could you be doing with your time? Pursuing higher-paying jobs? Taking a job that would give you some great experience and new skills? Different types of work that you enjoy more? Continuing education that will improve your abilities? Spending time with family? Actually getting a full night of sleep?
Because opportunity cost involves much more than just financial numbers it is clearly not a black and white exercise. You’ll have to make some educated guesses and it will force you to explore things that you might not otherwise consider. The goal of determining the opportunity cost of taking a particular job is simply to help you to better understand the broad scope of your career and your life, and to make decisions that will put you in the best possible position.
The next time you’re faced with the decision of whether to accept or decline work, take a few moments to think about the opportunity cost that is involved. It can be a very helpful habit to develop for evaluating the costs and benefits of your options. You’ll see that your work becomes more profitable and productive and your life will be more enjoyable if you base your decisions on the big picture.
Whether you want to learn while you work out or to make that commute useful, Freelance Radio is the place to hear all the tips, tricks and news of freelancing.
Freelance Radio
With over 100 weekly strips and counting, Freelance Freedom is an institution around here. Check out of all NC's brilliant work in the archives.
Freelance Freedom Archives
Interested in contributing to FreelanceSwitch? Write for the foremost freelance community and help share knowledge for the benefit of all!
Become a Guest Writer
Great Article!
Thanks
Aloke
Amen! I learned about this shortly before graduating from high school in my economics class—I have to say it was one of the most profound lessons I’d ever learnt.
Many people fail to realize what taking on that one gig from the client they hate costs them much, much more than the enjoyment they could have had. With that same time, you could have put some hours into a pet project, expanded your skill set, or found a new, better client. As a freelancer, you’re a business, and if you don’t think like an euntrapaneul, you’ll never get past being ‘just’ another one man shop.
i know this advice means well… but i am such a natural worrier, i seem myself not taking any work worried I’m passing up something else! yikes. I plan a lot but with the unforseen, i just have to make myself not look back, or id never move forward.
Interesting article but it doesn’t help me much. I’ve been quite indecisive lately or maybe it’s just the decisions I have to make. For example, which online financial tracking service do I use? There about 15 and after quite some time looking at the merits of each one, you can eventually narrow it down to about 5, but they tend to do the same and the only way to know which is best is to commit yourself to a full trial of the service which takes up time.
Great article. I appreciate the fact that you also mentioned the opportunity cost of spending time with family and sleep. Sometimes it’s easy to forget these things when struggling to build business, but sometimes a mental recharge is just what that business needs!
This is alright advice, a great reminder, but I’m pretty sure you learn this in your basic high school business course. However, it’s a very useful tip.
That was nice article I appreciate reading it, thanks for the information.
A good point and one worth being deliberate about. I’d like to add one piece of advice when thinking about the opportunity cost of taking one project over another, or even in deciding between spending time researching potential new articles (I’m a magazine writer) over taking a project offered today. If your only goal is to maximize income, the easy route is often to take the project offered today. However, if you have a long-term goal to focus on one particular niche, develop expertise in an area that excites you, or develop a platform for future books or speaking opportunities, it’s worth turning down projects that don’t further those goals, despite the opportunity to make short-term money. To use an analogy, the opportunity cost of going to college versus taking a job out of high school can be furthered, although I don’t know the math: sure, your opportunity cost in the example above is $60,000. But the real opportunity cost of skipping college is probably hundreds of thousands of dollars down the road, as the lack of degree limits your earning power. The same can be said for choosing short-term freelance projects (the “bird in the hand”) over working toward long-term goals.