My almost 3-year old daughter is in full-time daycare. Recently, we debated changing her schedule from 5-days a week full-time, to either a partial week or reduced hours, at the same daycare. They have different pricing plans for these options, and we wanted to analyze whether it made financial sense for us to change our plan around. The method we used was a cost benefit analysis, and it makes for a great example of how easy it is to apply this type of methodology to your daily life to help make major decisions.
Previously, I’ve posted about other forms of analyzing a decision (see: Payback Analysis and Opportunity Cost). Cost Benefit Analysis can encompass one or both of these, depending on the choice in front of you.
Cost benefit analysis gives the decision-maker a clear path to deciding whether certain benefits outweigh the costs of a specific choice. This decision could involve a new situation or changing a current situation.
The Economic Principle:
Simply stated, it’s benefits less costs. In a business sense, intangibles are usually assigned a dollar value, but this cannot always be done in “real life”.
Cost Benefit Analysis in Action:
I think this type of analysis is best explained through example. As discussed above, we recently analyzed whether to change my daughter’s daycare plan. In doing so, there were monetary and non-monetary factors that went into our decision.
Using sample costs, our daycare offers multiple options and each one has its own cost. We looked at the most reasonable options we would choose if we were truly going to change our plan around. Given that, we felt our choices were to keep her in full-time daycare ($1,100/month), reduce her hours to half-day ($970/month), or reduce her schedule to full-day three days per week ($990/month).
Now, if you’re thinking what we were, it doesn’t look like the part-time discount is really worth it. More on that later, but yes, you’re right.
As with opportunity costs, in this specific situation, there is no way to quantify these, as they consist of: time with my daughter, flexibility, and the sunk-cost fallacy of paying for daycare time that may not be used.
First, we looked at the monetary factors. The cost per hour of care seemed like a good way to put a price tag on each scenario. Here’s how those numbers looked on a monthly basis:
Wow, it’s easy to see that you get the best bang for your buck doing full-time care, given what your actual hourly costs are.
Because this particular analysis was predicated on keeping our current situation or reducing the number of hours of daycare we are paying for, we next looked at what the monthly savings equated to on an hourly basis. For Option 1, we would be getting 80 hours of care versus our current situation of 180 hours of care. We would save $130/month, so our savings per hour of care is $1.30 ($130/month savings divided by 100 hours of additional care). In Option 2, the savings is $1.53 for each additional hour of care ($110/month savings divided by an additional 72 hours of care). When it’s broken down in this manner, it is again easy to see that the additional cost is nearly negligible.
Another factor we accounted for was the possibility that there may be times when I would need childcare during the day, but my daughter wouldn’t be in daycare. Luckily, my parents can usually assist with this, but for many people that isn’t an option. The time would have to be replaced with a sitter or some other form of childcare. Babysitters in our area charge $20-25 an hour. Just looking at Option 1 and assuming a rate of $20/hour for babysitting, you would have to use less than 6.5 hours of babysitting (during normal daycare hours), to justify the $130 in savings.
Now let’s look at the non-monetary factors. As noted above, these can’t be quantified in dollars, but do relate to a monetary factor here (cost per additional hour of care). While the sunk-cost fallacy would have many people thinking that if they’re paying for full-time care, they should use it, that’s not necessarily the way to approach this. Full time care gives me flexibility that any version of part-time care does not allow for. It also makes more sense for me to have full-time care, even if I choose to pick her up early multiple days a week in order to spend time with her, because the cost differential between the options creates an incentive for me to pay for the additional time/flexibility.
Hopefully you’re still with me here. At the end of this all, we decided that the increased cost per month was worth it (currently). When broken down into the hourly benefit of either $1.30 or $1.53 per hour for the additional hours of care, I feel no guilt picking up my daughter early or, as with most days, getting her there later in the morning.
How Else Can This Method Be Applied?
Off the top of my head, I can think of numerous permutations to this one scenario:
- Hire a nanny or have your child attend daycare
- Go back to work or stay home with your child
- Hire a part-time nanny or have your child attend part-time daycare
Each of these situations has its own set of costs and benefits, and as noted above, some don’t have a price tag, while others do. For example, if you are currently attending mommy-and-me classes that charge $20/session and you go twice a week, that’s a $40 savings (benefit) that you would have to account for if you choose to send your child to daycare or hire a nanny instead. Conversely, you may decide that your desire to go back to work outweighs the benefits (how much money you make versus the cost of childcare), which can’t exactly be monetized, as it’s for your own mental health or your own drive to do more.
Whatever decision you make, cost benefit analysis can categorize all the factors of your decision into a simplified presentation that makes the process that much easier.