Applying leverage

I was reading a finance thread recently where the concept of leverage came up. Simply put, this is asking what activities get you the best “bang for your buck”.

If you’re a minimum wage worker, then activities that save you money are a good use of time because the return is high compared to your hourly rate. If you’re making eight bucks an hour and can save $2 by spending ten minutes making your own lunch, or $10 by spending an hour sorting through coupons, then those activities essentially pay better than working. On the other hand, if you make six figures, those activities aren’t a good use of time (unless you like making your own lunch). In fact, it’s even financially sensible to pay others to do chores you might not enjoy, such as yard work, if it frees up time that you then apply to higher-paying projects.

This applies at the business level as well. If task X takes a senior developer making $100 2 hours and a junior developer making $50k 3 hours, it makes more sense to assign it to the junior developer even though it will take longer. This has two benefits: the total cost of the task is lower, and it frees up the senior developer to work on projects that require his or her expertise.

At a personal level, this also explains why it makes sense to focus on your strengths. Suppose that on a scale of 1-10, I’m at skill level 1 on skill B and skill level 7 on skill C. I’m most likely going to work primarily on projects involving skill C, since that’s what I’m good at. Unless there’s some reason I really need to use skill B, increasing it to level 2 is less useful than increasing my skill C to level 8, which makes me even more valuable for projects that require skill C. (This is a long-winded way of saying that it’s good to specialize)

Would you rather be good at several things, or great at one thing? Would you rather spend an hour saving $10 or making $50? Where does investing your time return the best results?

2 thoughts on “Applying leverage”

  1. When you pay somebody to do a chore for you, and you save some time, but do you actually use the time productively, or just enjoy the extra free time?

    1. That’s the key, for sure – making sure you’re using the time gained in high-value activities.

      (Granted, if you’re really busy, just having some free time might be high value for you!)

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