Taking into account the full costs

Recently some pf blogs have been doing cost-benefit analyses, but have been forgetting to take into account all of the costs.  Here’s a gentle reminder of things that you should think of before concluding the analysis.

Opportunity costs

An opportunity cost is the value of the next best thing you could be doing/purchasing/etc.  So the daycare cost of a baby isn’t zero when a parent stays home with the child, but instead includes the cost of that parent staying home rather than working.  And that’s just the most  basic opportunity cost, as we talked about before, there’s even bigger costs down the road for the career of the SAHP.

Hidden variable costs

It’s easy to think about the fixed costs for things– what you pay upfront, or what you must pay whether you use the item or not.  But there’s also often per-use variable costs, costs that are only incurred when you use the item.

The cost of car ownership includes not just the purchase price of the car, not just the cost for insurance, but it also needs to include gas costs, repair costs, and so on.

The cost of cloth diapering isn’t zero after the diapers have been purchased.  Calculations need to include water costs (and, of course, the opportunity cost of one’s time spent doing extra laundry and removing poo, though a hidden benefit may be earlier potty training).

Ignore sunk costs

If you’ve already incurred  a cost, that shouldn’t count in your calculation– only the costs and benefits of your future potential actions should rationally count in your decision making.  So it doesn’t matter if you’ve spent 3 (or 4 or 5) years in graduate school already, what matters is if the remaining 3 years are worth it.

What hidden costs are we missing?

26 Responses to “Taking into account the full costs”

  1. Kellen Says:

    Does the cost of not doing things right the first time have a name? In the same vein, buying a cheap version of something that doesn’t work as well as a more expensive version?

    • nicoleandmaggie Says:

      In economics jargon? I don’t know off the top of my head.

    • delagar Says:

      That’s the Pratchett Boots cost.

      • nicoleandmaggie Says:

        It’s been a little bit since I read that Sam Vimes book, think the Boots cost is making fun of the “shoe leather” cost name: http://en.wikipedia.org/wiki/Shoe_leather_cost

        Though of course Vimes isn’t using it in that way. Hm… too much work for me to give this question the serious mental power it deserves.

      • delagar Says:

        Pratchett/Vimes says buying expensive boots costs three times (or I forget how much more) than buying cheap boots, but they last ten times as long. So in the meantime the poor guy has to buy ten pairs of cheap boots. Which mean the cheap boots aren’t REALLY cheaper.

        Only the poor man can’t afford the expensive boots, because he doesn’t have the upfront cost.

      • nicoleandmaggie Says:

        Ah, I thought it was Vimes and his love of his old boots because he can feel each cobblestone beneath his foot.

        The thing that causes that is credit constraints. (And another colloquial term is “false economy.”)

      • delagar Says:

        Except it really isn’t false economy, exactly, because the poor man would like to buy the better boots (he can see they’re better boots), he just doesn’t have the $150 to spend on the better boots; so he has to buy the $20 boots, which will last him less than a year; every year he has to buy these, where the rich guy can buy the $150 boots which last him 10 years.

        I mean, sure, it’s false economy, apparently. But only in a vacuum. In actual fact, he doesn’t economic free will. He has to have shoes, and he doesn’t have the spare funds to buy the better shoes.

      • nicoleandmaggie Says:

        It is a false economy if he doesn’t have credit constraints and makes that choice. With the credit constraints, he can’t borrow to get the more expensive shoes to pay back the savings later. So it’s an artifact of the credit constraints.

        Another thing it could be if there aren’t credit constraints has to do with time discounting– he may have a different time discount value of the boots than the price difference.

    • Debbie M Says:

      Yeah, there can be extra work and expense when you buy a lesser version and/or a higher cost per year of use.

      Also, there could be a cost in aggravation. Poor design can mean it takes longer to learn to use something or longer to use or that it requires more maintenance such as dusting.

      Yep, variable costs are often forgotten–you need to research the cost of things like additional ink for your printer and more expensive cleaning solutions for things like stainless steel refrigerators, plus things like whether parts for your car are cheap and easy to find (like for common cars) or expensive (like for BMWs). And a paid-off house still has costs for taxes, insurance (probably), maintenance and repairs, and maybe HOA or condo fees. It’s soo easy to forget these or to not even have any idea until it’s too late and you’ve already bought the item.

      Another hidden cost is associated costs that you get sucked into. So people who buy houses generally spend a lot more on decorating and even remodelling than people who rent, even if their house doesn’t need it any more than an apartment would, just because it’s possible. People who get a higher-paying job often end up feeling the need to buy more expensive clothes and eat out at more expensive places with their co-workers. If you get a job where you drive clients around, you might need a higher-status vehicle than you normally prefer. Once you have pierced ears, you’ll probably buy a lot more earrings than before. Once you have a new couch, you might want to replace more living room stuff that suddenly looks shabby in comparison.

      Or if you’re saving money in one area, you might end up spending more in another area to make up for something you’ve lost. Whenever someone cuts my mom’s hair too short, she starts wearing lipstick (and big earrings). If I’m going without a car, I might call a taxi, ride a bus, replace my shoes, make cookies for my friends who are driving me around, etc. more often. If you’re not using your dryer, you might have to (or want to) replace your laundry lines more often.

      When you are ignoring purchase price because it’s already paid for, if it’s something that you will want to replace regularly, future purchase prices will come up. Like if you’re retired and your car is paid off, that’s great. But is your car really going to last you 30 or 40 additional years?

      • nicoleandmaggie Says:

        Great example!

        That last paragraph gets into depreciation costs, but as you note, there’s easier ways to take into account the need to replace something than marking down depreciation like accountants do.

  2. rented life Says:

    Social costs? Working from home has it’s benefits, but I don’t regularly interact with other humans (not even via work email), I don’t feel like I’m a member of the company or have real co-workers, structure, etc. Not going to a meeting, and networking event or social gathering might be good because you feel like you could be making better use of your time, but you might lose out on other relationships, diminish existing ones or become “that person.” (Flaky person who never comes to anything.) You also begin to lose basic social skills (assuming you hopefully had them in the first place), as you become more isolated. Yes, you’re doing what you want with your time, but the isolation, making your world smaller, etc, isn’t always worth it.

    • nicoleandmaggie Says:

      Social capital is definitely important!

    • ana Says:

      Yes, and social capital can add up to some real financial gains, as well. Out of sight sometimes does equal out of mind, when thinking of promotions, collaborations (that may come with grant $, etc…) and other opportunities. I recently got my own lab space, which is great in theory, but also has cut down on a LOT of social interaction I got from working in my mentor’s (huge) lab. Some of that was purely social, but some was actual career-advancement stuff like “hey maybe you can help us run this analysis for our paper” (co-author-ship) or “ooh, should we collaborate on this project together?”(grants).

    • lessisenough Says:

      Also your judgment on appropriate dress starts to go away. You put on an outfit and look at yourself and think okay this is good and then you get somewhere and realize that it is not.

      Other hidden costs of working at home:

      You save time by not commuting, but errands pile up because you can’t stop and do things quickly on the way to or from work.

      You cannot easily work a gym routine into your regular schedule (e.g., stopping on the way to or from work). You have to set it up as its own thing which feels much harder to figure out and make happen.

      You spend more (both time and money) going out to lunch or dinner because you get tired of being in the same place all the time. This is especially problematic if you live alone and also work from home. Sometimes you just gotta get out of the house.

      If you can walk or bike to do errands, this addresses the Exercise and Errand and Getting Out of the House problem simultaneously (win-win-win) but makes it complicated when you forget one small thing that is not worth its own errand trip, but that you find yourself missing. (I just spent about a month wishing for a jar of pickles, because it wasn’t worth biking 30 minutes for, and I never remembered when I was in my car. Finally I ended up with multiple things like that and broke down and did a car-errand day to knock them all out at the same time.)

      • Rented life Says:

        You’re so right about dressing. I feel like I’m dressed well if I wear jeans. I took the job since nothing else was bring offered and I need the income but I’m very active in applying to other work because the benefit of staying home just isn’t enough against all the cons. I don’t leave the house for days. Depressing.

      • hush Says:

        Huh. I work from home after many years in Corporate America, and I came to the exact opposite conclusions. I have way more time for exercise (don’t have to pack a gym bag, can just go for a run right out my front door or do a workout tape or exercises right next to my desk with no one watching me.) I rarely go out to eat during the day, and I find I am much more organized about errands (which I outsource to one of my young paid assistants.)

      • lessisenough Says:

        A lot of this stuff depends.

        If you like to exercise at home, or you can walk or run from your house, then it’s easier. If you want to go to a gym, it might be harder or it might be easier — it depends on the proximity of the gym to the rest of your life, and how you get there.

        For me, it was easier when I worked in an office, becuse I commuted by bike, so I got exercise whether I felt like it or not, and I biked to a gym that was two blocks from my office. So the amount of time the gym workout added to my day was just the time it actually took in the gym

        If I want to go to the gym now, I have to include the time it takes me to get to and fron the gym as well as the time it takes at the gym. And I don’t like to drive to exercise, so that makes it take that much longer.

        So basically, it’s not that *any* form of exercise is harder, just that the kind I did, which I had built into my day, was harder.

        And these are things I didn’t really think about before I started telecommuting. I thought I would have a lot more time in my day because I didn’t have the commute but it turned out I didn’t get as much extra time as I thought I would.

  3. First Gen American Says:

    Staying home with kids or working from home definitely has added costs, most notably – heating and cooling…also electricity but that added cost is only marginally more. When I started working from home, my utility bills went up as did my food costs. My cafeteria at work was super cheap and I think subsidized. A bowl of homemade soup, $1. I also think I ate better when the food was prepared for me vs grazing from my fridge.

    There are all sorts of other small things I use more of now because they were free at work..toilet paper, tampons, office supplies, even showers. Not that I went out of my way to shower at work but if I went to the gym at work, I would use their shower and their free toiletries. Oh and they had a laundry service that washed your gym clothes and towels. It sounds pretty sweet but when you work in an environment where it’s very intense, they do what they can do make as many of your needs met onsite so that you put in more hours. (on site doctor, drycleaning, gym, cafeteria, bank..heck they even had the farmer’s market come onsite this year).

    This is just one example, the work from home one..but it’s sort of like talking to the gambler. They don’t ever tell you how much money they lost gambling, but go out of their way to tell you about the times they won. You can spin any story to tell the tell how you like it. I agree with you though, one of the biggest losses for me would be the career killer. A peer of mine took a few years off to be with her kids and now that her youngest is in kindergarten, she’s been trying to reenter the workforce and it’s been super tough…and that’s just a short break (I think 2-3 years)

    • ana Says:

      Yes on the heating and cooling! We had our mothers come take care of our sons in the first few months after I went back to work each time and while we saved on daycare (and likely doctors visits) the food/heating costs (fall/winter babies) were through the roof.

    • nicoleandmaggie Says:

      Free tampons? Whoa.

      We definitely use more a/c when I’m working from home. My partner is more able to handle heat.

  4. oilandgarlic Says:

    I would definitely add home ownership costs and work costs.

    I think some (maybe most?) people only think of their home purchase cost when they sell, and definitely don’t include all the maintenance, taxes, and interest paid to the bank.

    A co-worker of mine got a higher paying job but worked longer hours, And of course, from YMOYL, there are work costs like car maintenance, commuting, work wardrobe, etc…

    • nicoleandmaggie Says:

      Absolutely. All those people who keep saying that renting is just throwing away money– they’re so wrong.

    • Rosa Says:

      The costs of maintaining this house are DEFINITELY partly just a variable/did it wrong the first time cost, and partly a cost that should be tacked on to each and every object in the place and also to our working from home.

      My last employer saved a ton of money offering some of us the opportunity to work from home and then not having to provide desks or space for us. My husband’s employer maintains his office whether he’s there or not, because we live in a central hub for north american meetings, but in most locations they dont’ offer offices at all.

  5. Laura Vanderkam (@lvanderkam) Says:

    Oh, the opportunity cost of staying home is a big one. I think Sylvia Ann Hewlett had an analysis that taking 3 years out lowered people’s earnings by 30%+ permanently — beyond the 3 years of lost salary taken out.

  6. Carnival of Personal Finance #430: The Double Edition for Dummies Says:

    […] Just don’t forget to take all opportunity costs of your decisions into account. […]

  7. Carnival of Personal Finance #430: The Double Edition for Dummies | Save. Spend. Splurge. Says:

    […] Just don’t forget to take all opportunity costs of your decisions into account. […]

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