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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.