I was recently talking to some friends of mine about personal finances and an interesting question came up. My friend Alec, half-joking, asked “What’s a person’s life worth?” We are all familiar with the old adage – time is money. It got me thinking. What’s life if not a series of moments that add up to some amount of time and how you choose to spend that time? What exactly are we exchanging our time for? And how do we know what our time is worth? I thought to myself, in typical finance terms, I know how to answer this question. In the moment I gave my friends a quick example based on what I thought were accurate figures. Predictably the result was not pretty, but when I looked at the real numbers I was shocked. I found that the average person saves about $0.69 per working hour. That implies that the average person values their own time at this rate whether they realize it or not.
I’ll get to the exact math in a moment but I think it is first important to explore the mindset people typically come from when they try to make decisions based on money and time. During the past few years I’ve had some interesting conversations about time and how much money it takes to buy a bit of time. The typical view point on how much time money can buy goes something like the following few examples:
- I make $20 an hour so paying $17 for someone else to make my dinner is OK because it would take me at least that long.
- I’ve been working all week and barely have a moment to breathe, so I’ll pay $20 for that delivery pizza.
- I don’t have time to get both my chores done and entertain the kids. So, I’ll buy them a toy or a movie to keep them entertained while I get stuff done around the house.
One thing all of these examples have in common is that they have an implied exchange. A person is exchanging time at work for money, and then that person is exchanging that money to get some time back.
I’m sure there are plenty of other examples but those are a few that I have encountered recently that stuck out to me. While I am sympathetic to the feeling of not having enough time, I struggle with this myself, I have to take note of the lack of awareness occurring in these story lines. The truth is, unless you know what percent of your income you are saving then you cannot accurately make a determination between which alternatives take less time.
Where I think most people go wrong is they assume that what they get paid on an hourly basis is what their time is worth. Unfortunately, that is wrong. That may be an accurate assessment of what their time is worth to an employer, but to themselves a more detailed understanding of what they actually keep is necessary.
In finance and economics it is the money you keep that matters when determining value, not the money that comes in or goes out.
Just like a business, a person can make a profit, but only if their income exceeds all expenses. It is that profit (savings) which dictates the worth of an individual’s time for themselves. Let’s go through a typical person’s scenario to better understand this.
According to the Social Security Administration the median wage in the U.S. was approximately $31,962 for 2017. This is the total amount of money the person that is dead center in rank order of the economy made during that year. Roughly half the population made more and roughly half the population made less. To better understand what this person’s time is worth we need to know how much of that money the person kept after all of their expenses. According to the Federal Reserve Economic Data website, the savings rate based off of Disposable Income (income after taxes) has floated around 5%. Let’s assume, using a tax calculator, that the person in our example has an effective tax rate of 13.54%, or pays $4,327.65 in taxes (For a quick lesson in why your tax bracket is different than your effective tax rate please see Investopedia). Then the math to figure out what the person saves and is worth works out like the following:
If you don’t find this shocking or concerning, you ought to. What this breaks down is that the typical person only saves 69 cents per hour they work, $5.50 per day, $38.53 per week, or $1,381.72 per year. According to current interest rates (2018) that allows for a value of just over $46,000 if measured as a perpetuity (a never ending stream of income).
This is a complicated way of saying that the typical person’s implied value of their own time for the rest of their life is $46,000.
This level of detail is what is necessary to understand what you are trading your time for. At this level of income and savings a person who opts for an additional meal out at $17 is effectively saying they would rather work three days and an hour more to avoid spending the time, resources, and energy to make the meal themselves. When given the choice between a tasty meal at your favorite restaurant or an extra three days of free time spent anyway you like, which would you prefer?
Fret not, for all is not lost! The good news is that by changing something as simple as cooking for yourself once more per week can massively change the outcome. Let’s have a look!
If you would like to play around with the numbers to reflect your own situation I’ve included the Excel document here.
As you can see, cooking for yourself once more per week is the equivalent of adding $20,300 of value back into your life. As you change your habits and build skills the value of your time begins to increase and therefore your opportunity cost changes too. The higher your savings rate, the higher your personal value becomes and at some point it can become true that eating out once more per week actually makes sense again.
The take away here is that you have choices and the better informed you are about what you are saving the easier it will be to make the best of it. You have the opportunity to choose the value of your time. So, why not make the most out of it?
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