It's helpful to figure out how much your time is worth in order to weigh trade-offs between money and time. It helps to determine whether it's more economical to walk to the grocery store, to drive there, to order the food online, or to pay someone else to do it. If your time is worth $15 per hour (for example) it might make sense to drive to the grocery store, but if your time is worth $1,500 per hour, it may be better to pay someone else $15 an hour to do it for you.
But how do you calculate what your time is worth? The answer to that question determines when it's more economical to do certain activities yourself or to have someone else do them for you. Jim from Blueprint for Financial Prosperity does a quick calculation for the value of your time by starting with your annual salary and dividing by 4,000. The 4,000 comes from 50 weeks per year, 40 hours per week, and the fact that about only half (or so) of what you earn goes into your pocket. So an employee whose gross annual income is $80,000 would have her time valued at $20 per hour according to Jim's back of the envelope formula. (Which isn't a bad formula given its simplicity.)
Jim then went on to apply this to a drive-vs-fly to Long Island scenario: driving saves the plane fare and is slightly longer to do than the plane trip, and ended up being only slightly cheaper than the plane trip. All fine.
Jim's calculation is simple enough, but under the assumption that one can equate a dollar amount to one's time as he did, it values our time too highly for the simple reason that the person isn't earning anything after she leaves work. Her time may be worth $20 per hour at work, but it's worth nothing monetarily as soon as she leaves the building, unless she's earning money some other way.
It's more realistic to value her time at half of that, or $10 per hour. Here's my reasoning. Jim's calculation is based on 40 hours per week, but why value her time off the job the same as the time on the job? It isn't the same. Time awake is time awake that you can either be earning money, doing nothing, or spending money. Jim's calculation treats time off the job — “doing nothing” or “spending money” time — as having the same value as time on the job, which is “earning money” time. That's just not the way it is. I think there's a case for using 80 hours per week in the calculation rather than 40 hours as time that she could be earning money if she really wanted to. This is an extra 5 to 6 hours a weekday and a full day plus on Saturday. Plus, it's easy to divide by two. 🙂
Now, if the woman we're talking about is self-employed and earns through billable hours — that is, her income is directly related to how much she works — then it's fair to use the hourly rate at her job as the value of her time. Or, if the hourly rate includes all sources of earned income and all available time to earn income, then it's fair to use that as an hourly rate.
Again, all of this is based on the assumption that time equals money. It doesn't. Time is a scarce resource (we only get so much of it each day and over our lifetimes) and money really isn't scarce. Older people will place a higher value on their time (if they can) simply because they have less of it left. Even moderately young people might decide not to spend every waking moment working and earning because certain activities, like Christmas pageants, watching one's children grow up, etc., can't be replaced, and the costs of neglecting these activities are costly in other ways.
So anyway, it definitely is a good exercise to figure out how much your time is worth, but just be sure that you're not treating your leisure time as having the same monetary value as your on-the-job time. Otherwise you're selling yourself long. 😉
I think Jim did it right the first time. Think of it this way, when you buy insurance for your car, you don't tell the insurance company to bill you only for the drive time you use your car so if you're paying money for something that you are not using then inversely, the non-working non-earning hours you worked have to be calculated on the same basis as you earn.
If you have cable TV, you don't pay only for the view time.
If you have cell phone, you typically don't pay for only use time (unless it's prepaid cellular).
If you have a mortgage, you don't pay only for the time you live in the house, you pay the full mortgage.
So, technically, while you don't get paid for the non-working hours you work, they do have the same VALUE as the working hours just like your cell phone, mortgage, car insurance, cable TV, etc.
I'll offer the opinion that you're both waaaay undervaluing your time. When I compute the value of my free time, I use my fully-loaded hourly wage equivalent which includes an estimate for company-paid benefits and other extras. Then I either multiply that figure by 1.5 or even 2 since anything beyond my 40-hour work week is MY time, and if someone wants me to do work during it (or wastes my time), then it's OVERTIME. So while my basic hourly wage is X, I value my time at roughly 2.5 times X.
Sure, I may not get 2.5 times X for my free time from anyone (I sure don't get it blogging), and I certainly don't charge friends 2.5 times X to help them move furniture or paint a house. But if someone, say, screws up some paperwork and I have to spend an hour of my time straightening it out, you better believe that in the back of my mind, I feel they owe me 2.5 times X.
If life was infinite or much, much longer than it is, I might understand using your base hourly wage or even half of it for the value of your time. But as long as people are only living 70-100 years max, I'll value every second like it's worth a million bucks. Or at least a few cents.
@Sam: Interesting point, but with something like cable TV I'm paying for the right to watch the cable channels. I can make one hour watched per month cost $30.00, or one hundred hours cost $0.30 each. How much I watch is up to me.
@Punny: Well hey, I'm glad I came up to DC when Nickel was in town. That was some pretty expensive time of yours I was taking advantage of. You got Jim for less, and you got me at a bargain. (But then again, I'm the Mighty Bargain Hunter, so it's a propos.) I can kinda sorta see where you're coming from, but if you work overtime typing up some TPS reports on Saturday and you earn 1.5 X for your time, how does that increase the value of your time per hour? Benefits, yes, I forgot those. Overtime, yes, I forgot that. But you're working longer hours for more money, which means your rate per hour should go up only incrementally. $_overtime goes up substantially above $_regular, but d$/dt is small when you're working overtime. (And there you have it — the first PERL-like comment in a personal finance blog!)
I think the value of my time would have a lot to do with what I was doing. For example, leisure time is highly valuable (like Nick pointed out about overtime). But I also don't sell it, unless it's for a high sum. I might pay a smaller amount to keep it when I don't have a choice that the thing needs to be done (like groceries).
I do give it away to friends, family, bloggers. But that's ok. 🙂
I've done a seat of the pants calculation like this for years. But I consider another factor. Do I get some pleasure out of the money saving activity or is it something I find to be drudgery? I enjoy walking to run errands or to someone's house nearby. I chat with the neighbors, notice the birds and who is doing what to their house etc. So I don't need to save as much as if I'm doing something that I don't enjoy – like cutting out coupons. And I mostly calculate my worth based on how willing I'd be to give up free time to earn more rather than what I actually make. When my son was young and time was quite tight, I might need to save more even though money was tighter then and I made less – because I knew he'd only be a child for a short time and I'd never regain that time.
Some things don't take a lot of time and save enormous amounts of money – like calling around to get a lower mortgage rate. You'll save tens of thousands of dollars for a few hours time – even if it is something you don't enjoy. Well worth it. When evaluating money saving strategies I would make a three column chart with headings for time involved, savings involved, and pleasure/displeasure of the activity. Punny Money is right, time isn't infinite.
Actually, the assumption that time equals money is not only a good one, but one critical to economics, finance, and investing. The idea behind the ubiquitous phrase "time value of money" is why interest rates are charged on debt, why coupons are paid on bonds, and why savings accounts beats out burying money in the backyard. Simply put, $1 today is worth more than $1 tomorrow, and worth even more than $1 a year from now.
Of course, when you're talking about critical moments in life, there are other factors that may increase the value of your time. However, from a basic economic perspective, time is money.
You're actually supposed to divide by 2000, not 4000.
(40 hr/week x 50 weeks/yr = 2000)
I totally agree with the above analysis. Time is MUCH more valuable than money. "Time is money" is such a ridiculous saying; it makes young people all over the world think of their lives in terms of hourly wages! Don't we all realize that calculating someone's worth based on hourly work was invented by capitalists?! They use this tool to enslave their fellow person and have done well by it. So… I refuse to put a dollar worth on my time!