I have been asked to try to quantify how much time should a person spend when trying to develop multiple streams of income. I am an advocate of using your know how or skills to diversify your income from your job to have a more well balanced approach to income. In my blog post, 5 Paths To Wealth Creation And Financial Freedom, I wrote about how a person should have more than their employer’s paycheck to receive income. A good way to quantify how much time you should devote to new income streams is opportunity cost.
The opportunity cost definition is rooted in Economics and is the relationship between scarcity and choice. If opportunity cost is applied to an individual’s earning potential it can be thought of “what do I give up now to obtain something in the future.” For example, let’s say that you make $20 per hour and you have no opportunity to make overtime then your opportunity cost outside of your normal working hours is $0 per hour. At $0 per hour you can spend your non working time to pursue something that would gain you additional money. However, let’s say that you can work overtime so your opportunity cost to pursue something else would be $35 per hour if you receive time and half compensation.
Extra Job Opportunity Costs
Let’s explore the $20 per hour a little further. If you were faced with the choice of $0 per hour and working towards something to diversify your income then the choice is pretty easy. If you get a second job for $20 per hour and work an extra 15 hours a week then you would raise your income by $300 per week. That is pretty straight forward. You just gave yourself a raise. You took your income from $41,600 to $57,200.
If you have overtime at time and a half, then you would make $35 per hour for the extra time that you worked. Two issues with this approach are that you are not diversifying your income and you may not be able to get the same amount of hours that you could get with a second job. The decision to take the time and a half is a personal one that only you can make.
Pursing A Degree Opportunity Cost
If you are trying to decide to advance yourself by pursuing a degree or other job training, you must consider what you are giving up and what your potential earnings will be in the future. Sometimes, this is relatively straight forward. If you are a technician and make a salary of $40,000 per year and decide to get an Engineering Degree, at night, with an expected salary of $75,000 per year, then I say go for it! The opportunity cost of giving up part time employment to earn an Engineering Degree is low. It would take a long time to make that difference up by working part time. However, if you decide to quit your job to pursue the Engineering Degree and expect it to take two years then the opportunity cost would be much higher but still might be the right choice for you.
Being An Entrepreneur Opportunity Cost
If you decide to pursue being an entrepreneur things get much more complicated. The complication comes into play because things get much more risky. If you decide to start your own business on the side and you make $20 per hour and give up a part time job to do so, your opportunity cost would be $20 per hour. If you find the right niche and are investing your time in the future and have an expected $50 per hour potential this may be the right pursuit for you.
Chores Around The House Opportunity Cost
If your handy and can tackle jobs around your house or could pay someone to do it, what would be your choice? If you could pay someone to mow your lawn for $25 and work to make $50 the choice is rather obvious. If you factor in tougher jobs, such as plumbing or carpentry and would have to pay someone $70, then you could do it yourself and pocket the difference. Thus paying yourself but giving up the opportunity for other earnings.
Of course, all these scenarios are fairly clinical in the sense that many other factors come into play. Spending time with your wife or children, attending church or volunteering may be the most important thing to you. Like I wrote previously, the choice is personal but you would be giving up income, time or future earning potential. You have to decide…..