Monday, October 25, 2004

Give a money value to your time

Time is money.

Money and time are connected by two distinct ways: the time value of money and the money value of time. The former is related to the fact that $1 today is better than $1 dollar next year. Why? Because of what you can do this year with the $1 that you cannot do if you have to wait one year to get it. For instance, you could put $1 in a 2.5% return saving account and have $1.03 the next year instead of $1. Or you could reduce your 6% interest mortgage by $1 and save 0.06$ for the year.

Just as $1 today is worth more than $1 next year, 1 free hour today is worth more than 1 free hour in 1 year. That is, for the same reason, this is true because of what you can do during the year with this free hour. Let us suppose for instance that you have the choice between 100 free hours today and 100 free hours when you will be 80 years old. If you use your 100 free hours today, you could learn Spanish now and benefit from it for tens of years, provided you are currently young enough. If you wait until you are 80, you will learn Spanish and benefit from that for a few years only. Or you could die before reaching 80 and never use these free hours.

As a general rule, the later in your life you use your “time”, the lesser this time has money value. Keep that in mind. If you spend 1 hour of you time to save 0.25$ by comparing prices at different stores before purchasing a soap and that this saving will allow you to retire 1 hour sooner (that is, give you one free hour later in your life), you are not even, but you lost some time (and thus money). It is just like if one gives you the choice between having $1 today and $1 in 20 years: you better take the money and run.

Thus, just as well-invested money worth more with time, well-invested time worth more with time. Time is money, money is time. After all, what is money, if not the promise of exchanging some of you own time with the some of someone else?

The money value of time is much more difficult to define than the time value of money, mainly because people are used to give value to money and not to time. How to value what one hour of you time is worth? Let us do the math in an early retirement plan.

Suppose you earn $60,000 a year, from which $40,000 remains after taxes. Suppose you work 40 hours a week, 50 weeks a year. Thus, each hour you work provides you with $20 available for expenses and savings. Savings, on the other hand, can help you retire earlier, that is, it will pay later by providing you with free time.

We said earlier in our example that each hour gives $20 available. Let us set the money value of one hour to $20. Suppose that the value of this $20, if properly invested, is $60 when you will be ready to retire, after returns. Thus, one hour saved today is worth (in terms of money value) three when you will retire. That is, each additional hour you save at this $20 rate will allow you to retire three hours earlier, in this example. The earlier you retire, the higher the number of hours you need to save today to save hours at retirement. For instance, if I plan to retire tomorrow, each additional hour saved today will allow me to retire... one hour sooner tomorrow.

Now, what does that means in terms of savings? Well, it means that if your goal is to reach early retirement, you should not seek savings that make you work more today than the working time you will save later. That is why little savings that make you work make no sense. If you need to get saving coupons, printing them and go to 4 different stores to save 10$, you are not likely saving at all. Actually, you are working now, at very low wages, to retire earlier, yes, but how much earlier? Hardly the time you will have lost to save $10. You better pay $10 more and enjoy your spare time now instead.

Some rules and thoughts:

- Give a money value to your time. For instance, use your hourly disposable wages (the amount you earn each hour after taxes). Use your after-taxes wages since savings you make are also after-taxes amounts;

- Savings that make you work are worthless if the money value of the time you have to work in order to achieve the saving is greater than the money actually saved;

- The later you retire, the more value one hour saved today will have in the future.

Note that these rules don’t suit to everyone. I’ve said that you better not work one hour more today if it only allows you to retire one hour earlier, since the value of your hour today is greater that the value of your hour in some years. But this is only true if we talk in terms of the money value of time.

Time has other features than its money value. Suppose for instance you work 40 hours in an assembly line and you dislike the job, but you have no other choice. Suppose you earn a disposable $20 an hour on this line and that you can work one additional hour by repairing yourself something broken in your house instead of paying someone to do it and save $10. According to what I’ve said before, you could think: I better not work this additional hour to repair my house, since I work one hour now to save one hour in the future by retiring earlier.

However, if you like working on your house more than working on the assembly line, maybe you better do the house repair, even if both have the same money value. You are actually not only exchanging one hour doing something you dislike with one hour doing something you like.

Remember that retiring only is not only a matter of stopping working. It is also a matter of working on things you like, when you want, if you want and where you want.



Anonymous Anonymous said...

Well Jack, that was a VERY dep analysis. I never looked at it in this aspect... even though I always knew small painful savings were a waste of time (running around town for 5 cents off the price) now I can demonstrate why.
Keep up!

5:45 PM  
Blogger Our Money Staff said...

Wonderful breakdown. Are you an economist?

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Blogger Yaniverse said...

Very good analysis. I highly recommend deciding on a time value number ($12/hr? $24/hr? $96/hr? whatever fits your income) and quickly make decisions based on that number.

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