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Thursday, January 19, 2012

Insource or Outsource?

A while ago Mr Money Mustache did a post on 'in-sourcing', and this is a concept that was also mentioned by Jacob Fiskar in "Early Retirement Extreme".

The concept of insourcing is spending your effort doing various tasks directly instead of working to get money and then using that money to pay other people to do these tasks. Not only will you save money this way, but you will build an extensive knowledge base of useful and potentially income-producing skills.

Obviously you can't do EVERYTHING yourself, and sometimes you would actually be saving money by paying  a specialist to do something rather than incur the full cost of the training, experience, and equipment necessary to do the job to a satisfactory level.

So which things should you pay others to do, and which should you 'insource'?  Personally I make the decision based on a few factors:

 Determine if a job is skill-based, knowledge-based, or labor-based.

1) Labor based jobs are something that can be done by anyone with little or no training, and for which the only things you would be paying for would be time and human labor. You should be doing pretty much everything in this category yourself.

Examples would be: Digging a ditch, cleaning, laundry, lawn mowing, moving, car and pet washing, etc.

2) Knowledge based jobs require a certain level on know-how, but very little experience to do well. They are things that you have to know what to do, but if you have instructions you can usually do just fine even on your first go. They don't require years of experience or natural skills. With the library and the internet at your disposal, you will have instant access to more than enough knowledge to do almost everything in this category.

Examples: Cooking (regular, not gourmet), minor car repair and maintenance, most home repairs, investing, minor plumbing and electrical work, etc.

The only exception would be for areas where not doing it right would incur a significantly negative outcome. Lawyers have mostly knowledge based skills, but you wouldn't want to try to learn law yourself in all situations. Writing a will or a rental lease, sure. Fighting a traffic ticket, go for it. Defending yourself at a murder trial, ehhhh not so much. 

3) Skill-based jobs require either experience, innate prowess, or sometimes certifications. Sometimes it is simply knowledge, but such an extensive amount that it is unrealistic for you to obtain in the time required. It is usually, but not always, cheaper to pay somebody else to do these things than it is to get the experience, skills, and certifications yourself. Sometimes legal reasons prevent you from doing it yourself as well. You may have all the knowledge to know what medicines you need, but you can't write yourself a prescription, so you will still have to have a Dr's appointment.

Repair of a musical instrument would probably fall into this category. Doctor visits and surgery, skills like playing an instrument or singing, operating vehicles that you don't have licenses for, fixing complex devices, or complex computer coding requirements, etc.

These guidelines should help you determine whether you should be in-sourcing or out-sourcing. But to be honest, most things we pay people to do fall into the first 2 categories, so start IN-sourcing and save that money!

-The Money Monk

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