One piece of personal finance advice I hate is “know what your time is worth.”
If all they meant was “realize your time is valuable,” I would strongly agree. But usually the application is something more like “since you make $25/hr at your job, any activity less lucrative than that is a waste of your time.”
This advice actually can still be right, but it’s often wrong.
Another mistake that I see people making is thinking that if they get paid $25/hr, a dinner that costs $25 cost them about an hour of work. This probably isn’t true.
Here are five reasons why the normal advice about valuing your time doesn’t make sense.
It Ignores Context
For the ultra-wealthy, it makes sense to calculate the cost of their time.
If you’re struggling to make ends meet, it doesn’t matter if an opportunity costs time as long as it helps you balance your budget.
When money is tight, you don’t have the luxury of picking the most lucrative uses of your time. You have to take the opportunities that are available to you to make or save money. Even if they come with a steeper time commitment than you prefer.
The Wednesday at 8pm Test
You might think your time is worth $25/hr because that’s what you get paid at work. But could you make $25 this Wednesday from 8-9pm?
If you have a salary, you can’t get paid more by putting in more hours. In fact, on an hourly basis, you get paid less for working more.
Even if you are making a wage, chance are your boss doesn’t want you making overtime and you aren’t allowed to work outside your assigned shift.
You can only consider your time to be worth $25/hr if you have the ability to generate an extra $25 by working an extra hour. If you can’t do this, your time isn’t worth $25/hr. Your 9-5 hours are worth $25 and the rest are worth $0.
Savings Can Grow Passively
Let’s say you make $25/hr and you paid someone $20 to mow your lawn. You reasoned that it would have taken you an hour to mow the lawn, but an hour of your time is worth $25. So you decided to outsource it to someone who’d do it for less.
What if you had mowed the lawn yourself?
You could have opened a Roth IRA and invested the money. Let’s say you invested in FZROX, Fidelity’s total stock market index fund which has no fees or investment minimums. What would happen to your money over time if the market returned 7%?
- Your money would more than double to $42 after 11 years
- In year 24 you’d cross the century mark
- By year 34 you’d hit $200, 10x your initial investment
- And it just keeps going up with time
So maybe it cost $20 to have someone mow your lawn. But you could also say it cost $100 or $200. That’s not enough that you’ll never have to work again, but it’s not nothing.
I’m not saying you should never pay someone to mow your lawn. I’m just pointing out that opportunity cost is real.
Your Hourly Rate is Lower Than You Think
Here’s how most people calculate their hourly rate:
- “Let’s see, I make $50,000 a year…”
- “A year has ~260 weekdays …”
- “Minus 10 holidays and 15 vacation days…”
- “Means I work 235 days a year…”
- “At 8 hours a day that’s 1880 hours…”
- “$50,000/1880 hours = $26.60/hr“
I hate to break it to you, but it’s not even close to that simple.
First, you forgot your commute. A half hour each way means an extra hour a day. So you’re really working 2115 hours a year. Oh, and most people actually work 8-5 not 9-5 anyway. So when you factor in lunch hour and commute, it might be ten hours from when you leave to when you get home.
And that’s assuming that you cap your actual working time at 8 hours.
Just as we can add hours to your total time spent working, we can subtract work-related expenses from your salary.
The cost of your commute is an expense you wouldn’t need without your job. Same goes for a professional wardrobe. And childcare.
Oh, and I haven’t even mentioned taxes yet.
When it comes to calculating how much you actually make per hour, the numerator is lower than you think and the denominator is higher.
This concept of calculating your “real hourly wage” was introduced to me by the book Your Money or Your Life by Joe Dominguez and Vicki Robin. It made me mad. It should make you mad too.
Related Post: Your Money or Your Life Summary and Book Review
Your Goal Should Be to Blur the Relationship Between Money and Time
They say that time is money. You can see why this idea makes sense:
- We spend a lot of time working for money
- Later, we turn around and use the money to buy back our time (e.g. retirement)
In many ways, time and money are resources that can be traded for each other.
But it’s important to remember that trading time for money isn’t the only option. You may currently be selling your time, but it’s also possible to invest your time creating something you can sell besides time.
Let’s say your a tutor. The business model you are used to is selling your time to clients. But you can invest your time into creating a study guide that you can sell to customers. Now your income isn’t dependent on how many hours you’re free to work, but on how many buyers you can find for your product.
Chances are this will still require an ongoing investment of time. If you never promote or market your product it’s unlikely you’ll generate many sales. But the creation of an asset drives a powerful wedge between how you spend your time and how you make your money.
Other powerful ways to decouple time an dmoney include:
- Starting a business
- Real Estate
- Investing (e.g. in the stock market)
- Creating digital assets (e.g. websites, YouTube channels, etc.)
Some of these might still require huge investments of time and all carry at least some risk. But the upside of finding a way to make money without spending additional time is enormous.
Putting it All Together
How should you think about your hourly rate?
Ideally, you wouldn’t think about it at all.
In the best case scenario the exchange rate between time and money will become so distorted that it no longer makes sense to think about.
But if money is tight, this is a luxury you can’t afford. In this case you probably need to calculate your “real hourly wage” and think about how to raise it. Preferably while lowering your expenses.
Next you should start thinking about how you can invest your time into creating something you can sell besides time.
Your time is precious. Invest it wisely.