Saturday, November 28, 2009

Time is Money (a quick and free guide)

Putting an explicit monetary value on your time has the advantage of ironing out certain irrational habits. (Of course, if taken too far it could be a source of stress, for example if you were to constantly interrupt your leisure time with thoughts of how much it's costing you.) Here's some advice for putting a ballpark dollar value on your time.

  1. Your time value should be your marginal salary increase if you consistently were to try to work an extra hour, not your average hourly wage. Your marginal wages may be above or below your average wages, depending on your circumstances. (If you're unlikely to follow through on efficiently working the full extra hour, you would want to factor that in.)
  2. Factor in expected marginal taxes, both personal and (for some entrepreneurs) corporate taxes.
  3. Factor in a discount rate if returns are far in the future or if you're currently short on cash.
  4. For entrepreneurs or anyone else exposed to high levels of risk, figure out an expectation value and adjust for your personal level of risk aversion.
Setting a time value doesn't magically instantly increase or decrease your cash flow. However, it does help you decide whether you should:
  • spend more (less) money on leisure activities and personal expenditures, and indulge in less (more) leisure time
  • invest more (less) money in business automation and hired help
Not all hours are equal; the monetary value can be adjusted by situation based on many criteria, such as:
  • How pleasant or unpleasant is the given activity?
  • Does the activity provide a learning opportunity?
  • How much does the activity affect your level of mental fatigue?