Saturday, March 29, 2008

The Real Cost of Outsourcing Tasks

Sometimes it’s just so much easier to pick up the phone and call in someone else to do a job. They have all the right tools, they will get it done faster and you will free up some time to do whatever you would like. Sounds like a winner, right? For those of us with limited resources, in other words, those of us who are not handy or just don’t want to learn any skills other than our 8 to 5 jobs, it may be the only way to get something done. I hear and read about a lot of folks, even PF bloggers, who rationalize away such tasks by stating that their time is worth more, etc. That’s fine, just be aware of the added cost and the impact to your wealth building dreams.

What most people forget is that by hiring someone else to take care of a task that you could do yourself you are paying a premium for that work. Most of us earn money in pre-tax dollars, but we pay bills in after tax dollars. Therefore, when you pay a $500 landscaper’s bill, it really costs you much more depending on your effective tax rate.

If you have completed your taxes for the year, that rate should be fresh in your mind. My rate, for instance, came out around 20%, which means I must make 1.25 to keep one dollar. It also means that I will give up $625 to the landscaper for a job that I could do myself. Think about this a little deeper. If I did the work myself, I would be receiving the equivalent of a $625 raise.

To take this even further, we need to look at the wealth building power of that $625. When it comes to investing, you have probably heard that it takes money to make money. By hanging on to the $625 and investing it, instead of spending it, it will grow into something much more. At a 6% rate, it will double in 12 years.

To demonstrate that I am not just blowing smoke or preaching hot air, I will share a real life example. Not long ago, I needed to replace the faucets in my house. They were cheaply made, contractor selected faucets, that still worked after 15 years, but looked terrible. The plating was cracked and peeling off the plastic parts, some of the drain plugs would not seal and some had leaked/dripped water in the cabinet under the sink.

I had never done much plumbing work, but the cost of hiring a plumber to replace five faucets was daunting. One estimate for labor only was $150 per sink or $750 for the whole job. I decided to give it a try. If I couldn’t get the job done, I would bring in a professional. How tough could it be? After all, each faucet comes with instructions for installation and there is a ton of “how to” info on the internet.

The first one was a challenge. I started having my doubts. The cabinets under the sink were cramped and dark and I didn’t have the tools (like a crows foot wrench) that fit into small spaces. As with most tasks, there is a learning curve. I eventually figured out what needed to be done first, second and so on and how to make do with the tools that I had. Each night after work, I removed the faucet and drain apparatus from one sink, cleaned the sink surfaces and prepped for installation. The next night, I installed the new hardware, cleaned the area and repainted the cabinet under the sink. By the third sink, I was very comfortable with the tasks at hand and actually enjoyed the work. It provided a sense of accomplishment and was a real confidence builder.

The bottom line is that by developing and growing our own resources and learning new skills, even if they are fairly simple skills, we will be able to do more things for ourselves and hang on to a lot more of our hard earned dollars. And by investing the money that you saved, those dollars in turn will work for you. In the end, developing your resources can help lead you down the path to true wealth.

1 comment:

  1. In my opinion not all tasks can be outsource like plumbing. Tasks that can be done with the use of the internet can only be outsource like administrative tasks. I also get your point that it can save you cost when you do tasks all by yourself and you can spend it on more important things than paying it to someone who works for you. However, outsourcing tasks is not applicable to kinds of tasks. There are also set of guidelines when to outsource tasks. One of the main reasons why people are outsourcing tasks is to help them improve workflow. Outsourcing is also a great way to save you costs where clients are not required to any employee related taxes and insurance or benefits. Another is outsourcing is a great way to start a small business.