Have you ever wondered how to value time? Especially YOUR TIME?
Actually, time can be easily valued. It involves a few inputs.
- What are your current monthly salaried income, after deducting all the fees eg. taxes, annuation, etc? (ACTIVE INCOME)
- What are the growth in income for your industry sector (for business)/company (for salaried workers)? (% CAGR GROWTH)
- How much time do you have left? (aka. when do you think you will die, based on statistics, habits and behaviors.) – (TIME LEFT)
- What are your current fixed and variable monthly expenses? (ACTIVE & PASSIVE EXPENSES)
- What are you spending your time on during your free time (OPPORTUNITY COST)
For this month’s article, I will talk about Point 1 (ACTIVE INCOME).
First of all, to find out what your time is worth in the present, take the ACTIVE INCOME you earn a month, and calculate it in terms of hour, day and month. The most important is the hourly rate, which you must then write on your bedroom wall and see it every morning and night. I will come to this hourly rate later.
SCENARIO 1: You earn $10,000 a month, and deducting all the taxes and annuation, you left with $6,000 a month.
However you might not be putting in 30 days of the month for your work. You might be working up to 26 days a month (averaged out over 365 days) which gives you approximately $230 per day of work.
Next, do you actually work a full 24 hour day? Probably not. In normal 8 working hours, you might then get approximately $28.75 per hour of work, as the hourly rate.
Does $28 for an hour of your time sound a lot? Or little? It depends right? However it sounds pitifully little to me, because you might be able to gain more income somewhere else, with lesser time.
The numbers can fluctuate, but you get the point. And you have to be honest with yourself; does your work require you to put in only 8 hours? Or are you a workaholic that is putting in 12-16 hours of work (like those in China) for that same amount of salary? Then the story changes drastically, because working 12 hours equals to only $19 per hour of work, and working 16 hours equals to a pitiful $14/hour. What’s the minimum wage in your country?? Are they even paying you the minimum for all that overstretched working hours?
For business owners and investors, the story is slightly different, because the actual amount of time they spend on making money usually decreases over time. A business owner may actually be only spending 2-4 hours of productive time a day to create or maintain their wealth generating machine (i.e. their business), while his/her employees are hard at work to push for a higher salary and bonus at the end of the year. It’s really pitiful.
SCENARIO 2: Imagine a business owner that drives in a monthly net-net income of $5000 a month (businesses have the advantage of using tax agents and government incentives to actually bypass all those tax-requirements that employees need to pay), and the boss only works 10 days a month, the rest he might be out golfing, or looking at other businesses, or investments, or whatever.
$5000/10days = $500/day.
Now, if he only spends 4 hours a day to work, what is his hourly rate? That’s a whopping $125 per hour!
Now look at the huge difference. Even though both of them bring in $5000 a month, but boiling down to the hour, the rates of $28.75 VS $125 is a huge difference (430% difference).
Why is the hourly rate so important? Because your time is a finite resource. Only you can control your time, but most people don’t control their own time resource well, and give it easily to others.
Imagine the boss, being able to spend his time with his family, which is a priceless experience, while the worker has to slave through his life working for someone else for a measly $28.75 per hour. And furthermore, because of all that extra time available, the boss could venture into other businesses, generating even more income. (4 hours vs 12 hours = 3x extra time to be productive, which means he/she can potentially earn at least $15000 if he is as hardworking as the salaried worker).
Now consider another point, bean counters who scrimp and save on every single point might be on the losing end, why? Because the time has not been spent well.
SCENARIO 3: Imagine deciding to save some money, instead of buying an apple juice, you have decided to process the apples yourself. Of course, we have to ignore the other facts on whether the apple juice are processed, and the time you take to buy the juice vs the apples.
Now if you just buy the juice and drink it immediately, the time spent in this scenario is zero. How much is the difference between 5 apples and a bottle of apple juice? Maybe $10 vs $5? A $5 dollar difference? (For some cases, the juice might even be cheaper!)
But buying the apples and bringing them to your home, AND washing them, cutting them, and grinding them – will these take an hour? Lets just say it takes 15 minutes.
So for the boss whose time is worth $125 per hour, 15 minutes = $31 dollars.
Compare spending 15 minutes (aka $31) to process the apples vs buying an apple juice directly (paying $5 more), I think this is a no brainer.
But unfortunately for many people, sometimes no brainers are too difficult to comprehend…
So, question to self: What’s your hourly rate?
