Most in-transition job seekers are acutely aware of their “burn rate”, the amount of savings used to support yourself while in job transition.
But fewer in-transition job seekers have the same awareness of their opportunity cost – how much is lost by not working.
You’ll want to think about opportunity costs on a weekly or a daily basis – it reflects how you make job search related decisions.
If you’re focusing just on your annual salary and dividing by 52, you’re underestimating your opportunity cost by a significant amount.
It is critical to know your opportunity cost, because it can effect many decisions you make in your job search.
Your opportunity cost can affect these decisions:
- Should you take a lower paying job, or wait for a higher salary?
- Should you pay for help in your job search?
- Should you take a lower paying part time job or contract work?
It’s not quite as simple as dividing your annual salary by 52 weeks. You also need to include benefits in this decision.
Benefits are more than health insurance – You need to also consider the effects of:
- Vacations & Holidays: Most employers give 2 weeks vacation to new employees, and between 6-10 holidays
- Sick time: Most employers give 5 sick days to new employees
- Medical/Dental/Vision insurance benefits
- Short term/Long term disability insurance benefits
- Employer paid life insurance benefits
- Employer portion of Social Security payments
- Pension benefits
- 401K matching
- Other: May include education, child care, automobile, subsidized public transportation, and other benefits
- Bonus/stock options: May range from 0 – 100%+ of annual salary, depending on position and employer policies
The average company pays about 30% on average benefits, not including bonus/stock options. To adequately estimate your opportunity costs, you’ll want to start with 130% of your annual salary.
The calculation looks like this, for someone expecting a $50K annual salary.
Divided by 52 weeks
Divided by 365 days
For each $10,000 of annual salary, you lose $250 each week you remain out of work.
Here’s a table that gives you a ballpark idea of how much you lose each week or each you’re out of work, based on income levels.
Opportunity cost per week
Opportunity cost per day
Now that you’re armed with all this info, how can you use it?
Well, let’s say that you made $80,000 at your last job, but you get a job offer for just $75,000. Should you take the offer?
One thing to consider is how close and how likely you are to find other job offers. Since your opportunity cost is $1,875 per week, you’d have to get another job for more money and start in less than three weeks to make the same amount in your first year ([80,000 – 75,000]/1875 = just under 3 weeks). If you don’t have other opportunities that you’re pretty certain will turn into offers (and soon!), it could actually pay to take the lower offer.
When you take the emotion of accepting a lower salary out of the equation, it could make sense to take a job at a lower salary … simply because you could make more money in the first year by taking the job, rather than waiting.
What other decisions could your opportunity costs help you to make?-------------------------------------------------------------------------------------------------------------------------------------
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