People will spend an inordinate amount of time to save a few dollars. There’s often a lightbulb moment that happens when you ask them to calculate their time-dollar value, because it reveals that they’re spending more in soft costs than they’re accounting for.
Take a second to think about it. If you spend 3 hours avoiding paying $12 for something – or researching whether you should – yes, you’ve saved money, but you’ve also been working at $4 per hour. If you’re an entrepreneur, your time is worth more than $4 per hour, and while your choice has saved a “hard” cost (money), you’ve spent more in “soft” costs (your time). Energy and attention are two other soft resources we need to be thinking about, too.
Soft costs are just as real as hard costs. In that 3 hours, you could have been doing $300 worth of revenue-generating, high-value activities. A more complete picture is that you’ve spent $300 to save $12.
It’s a bit different when you’re employed by someone else, as you’ll make the same whether you spend 3 hours or 30 minutes to get something done. At least in the short term. The people who actively add more value to their organization before being paid to do so are the ones most likely to get a promotion or advancement that honors their contributions because they show up in a different way.
Outside of “work” situations, think about how much time you spend doing things you’d rather not do, like cleaning your house. Is it worth $100 to not have to spend your weekend cleaning your house? (Question the assumption that you “should” do that if it’s coming up for you. Why should you clean your house any more than you should fix your car?)
The next time you’re thinking of making a decision that involves hard costs, also consider the soft opportunity costs of what you’re currently doing. No decision is made in a vacuum.
Keeping costs down is always a great thing to focus on. Just make sure that your focus on keeping costs down isn’t also keeping your revenue or earning potential down. (Tweet this.)
In my experience, this is something we have to learn over and over again, especially as costs increase significantly. We accept that it’s not worth our time to worry about $10, but when it’s $100, we get cheap again. Then when it’s $1,000, we get doubly cheap. Our ability to accept and acknowledge changes in our revenue or earning potential outpaces our ability to be clear about costs.
Excellent points Charlie! This is such a thought-provoking article. Soft costs and hard costs are somewhat new term to me but the concept leaves great impact. Figuratively, soft costs are hard because they often require long standing effort and patience that we have to bear in whatever business activity we will be conducting. This is why it is important to give value to soft costs.
Charlie,
Thank You.
I find it is more worthwhile to work according to my priorities. So, I schedule a high priority task in the morning. After I have reached my goal, I take a break by cleaning the home.
After all, cleaning the home is not worth my time, money and energy, but it has to be done anyway. The devil lies in the details, but I need to schedule that sort of work during recess or when I need a break. Even low-priority tasks like running errands, household chores-are important and somebody’s gotta do it. So, really one needs a little perspective here and there. I save up my peak time for high priority, value added activities. When I feel sluggish, well, it’s time to do my laundry, pay the bills, and clean the dirty dishes in the kitchen sink.
Cheers.
Great post, Charlie. As Jim Loehr has put it, the fundamental currency of human performance is energy, not time. Some activities may produce some money, but they may incur enormous soft costs, the most underestimated of which is probably energy. This is so critical to consider, when deciding what activities to engage in…and which ones not to.
I agree, although sometimes I enjoy the challenge of trying to make my own breakfast cereal or whatever it is I’m trying to “save money” by doing myself. In these cases, although I’m losing out on hours of my productive time, I still go for it if it brings me joy.
I love this post! I totally operate on this number-crunching philosophy, but its the first time I’ve seen it explained so well. Thanks for shedding light Charlie!
I think you’ve shed some light on a big issue. I think one of the major arguments is who can achieve such a high value for an hour of time? Would you rather do something with a guaranteed return on investment or try to come up with new ideas? You could argue that it depends on the situation. 😛
-Ravi Gupta
I have a question. Where can you categorize the cost of shipping and handling, insurance and taxes to be paid at both end countries? Soft or Hard Costs? This is for an energy project from USA to Africa.
So dead on. Great article.
It’s funny how different industries and situations use the hard cost/soft cost terms differently. For example, based on a quick web search, it seems that the construction industry has a completely different meaning where “hard” costs are for tangible goods and “soft” costs are essentially services.
This article is heading in the correct direction as a general definition, though it misses coming right out and stating the very easy definition:
A hard cost is something you must write a check for it. In other words, you pay for explicitly. If you don’t write the check, you don’t get the work done.
A soft cost is an invisible cost incurred because you buried the task in someone’s jog you are paying them for anyway. No explicit check gets written. The cost is more the instantiation of the opportunity costs, e.g., what could the employee have been doing while they performed the soft cost task.?
The key to remember is, if you write a check for it, it’s a hard cost. If you don’t write a check for it but are paying someone to get it done, it’s a soft cost. A soft cost also includes avoiding writing a check by doing it yourself instead of your more valuable core tasks.
Great distinction, Boomer! I’ll have to think more about it; my gut tells me that there are things I write checks for that are soft costs, so, for me, I think it’s the explicitness of the relationship between the outcome that’s doing the work. So we’ll call the “check-writing” qualification as a good rule of thumb. 🙂