Figuring Out Exactly How Much Your Time Is Worth

JacksonA couple of days ago, I made an offhand mention of the value of knowing what your time is worth so you can quickly determine whether or not it’s worth your time to do a task yourself, pay someone else to do it, or simply not do it at all. This resulted in several emails from readers asking all sorts of questions on the topic. For the most part, I pointed them to the true hourly wage, which is a portion of the 31 Days to Fix Your Finances series, but I thought it might be worthwhile to actually address the calculation itself.

Calculating this number is fairly easy. First of all, how much did you make while gainfully employed last year? Don’t include investment returns or anything like that. Now, from that amount, subtract every single extra cost incurred because of that employment, such as child care, transportation costs (gas, car maintenance and repair, etc.), your work wardrobe, extra meals, office supplies, gifts, and so forth. Spend a bit of time thinking about this: what extra costs do you have because of your job? If you don’t know an annual amount, figure out what it costs you per week and multiply that by 52. You can handle taxes, Medicare, and Social Security either way – it’s your call on those. I would also add back in any benefits given to you by your employer, like health insurance and so on.

Then, calculate how many hours you devote to your gainful employment each year. You might work 40 hours a week for 48 weeks a year, but that’s not really it. You also have your commute, the extra time you work outside the office, business travel, time invested in securing and maintaining child care, business dinners and parties, and so on. Again, if you don’t know how much time you invest, make a week’s estimate and multiply by 52, or make a month’s estimate and multiply by 12.

Once you have those two numbers, take your real wages and divide it by the real number of hours you put in for your job. That, my friend, is what your time is worth per hour using your current employment as a benchmark.

Obviously, doing this in ten minutes as a napkin sketch will be a real shock, and many of you will brush off what that number is actually telling you – I’ve seen it happen many times. But here are just a few things that you can get out of that number:

If your job makes you miserable, really look at that hourly wage and ask if your misery is worth it, and realize that you can earn $9 an hour at Home Depot while saving your creative juices for other things. You’d be surprised how many people who have “good” jobs in actuality are being paid McDonalds-esque wages for their true efforts.

If you’re working hard at building a career or a business and that makes this number seem low, then realize that you’re building a small amount of non-financial capital with each hour you work. I like to use the analogy of my blogging with this: I make a little more than minimum wage from blogging, but with each post, my hourly wage from it goes up slightly. Why? That post is more than just the time I invested in it: it sticks around and continues to earn over time as visitors to the site find it and read it.

If you’re trying to decide if doing some task is worth your time, calculate how much money that task is worth to you. Let’s say that you can make $12 an hour sitting on your back porch writing, but your lawn needs mowed. If you can pay the neighbor kid $10 to mow your yard, then it’s worth it – you actually earn $2 by sitting on your porch writing while the neighbor kid mows the yard. But if your time is worth only $8 an hour, then you’re better off mowing it yourself. Once I figured out my true wage, I started thinking of a lot of things in this light.

For me at least, when blogging significantly surpasses my true hourly wage, I may consider making blogging my full-time job. It’s not there yet, so for now I just do it in the evenings as a hobby.

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  1. Shadox says:

    ALthough this calculation gives you a good benchmark, it is not a true measure of the cost of your time, for the following reasons:

    1. You will not be paid your hourly rate for sitting on the porch or watching TV. In fact, you will be paid nothing for that time, so from an economic perspective, if you save $1 an hour by doing chore yourself instead of watching TV, it is still worth it. What you are pointing is the equivilent of opportunity cost – but an opportunity cost is only real if you truly have the opportunity to save / make the amount of money in question. If what you are really going to spend your time on is hanging around, you are not truly making any money.

    2. Now for the opposite argument – even if I am paid $50 an hour to do a chore, it is not worth it to me if that is the last leisure hour I have in the day. There is a diminishing utility for money, if all you do with your time is use it to make more money…

  2. guinness416 says:

    I worked out my hourly wage after reading YMOYL too, and found out some very interesting things. My job adds $0 to my transportation costs – public transit pass I’d need anyway. Adds essentially $0 to my food costs – I pack lunch and often am provided lunches at client offices. Adds minimally to my clothing budget – we’re business casual. And so forth. I definitely pay a cost in energy at the end of the day though.

  3. I’ve seen other bloggers write on this topic in the past, but I still think you’re making a large assumption when you talk about valuing your time, and that is this: most jobs don’t let you work as many hours as you want. Your free time is not worth anything unless you have the means to be making money at that time.

  4. S. B. says:

    I agree that this discussion is really all about opportunity cost — probably the most important concept in economics! I also agree that the original article makes the assumption that one has opportunities worth more than the task in question. I would add two points, however.

    1. Overtime jobs are a lot more common than you might think. During the late 90′s, for 5 years I worked a white-collar job where I could essentially work as many hours as I wanted at a flat hourly rate. (40 hours/week…80 hours/week…whatever I wanted to work.) During that time, I paid people to do a lot of tasks I could have done myself because it made financial sense to do so. My objective was not to minimize my spending level, but to maximize the difference between my income level and my spending level.

    2. The opportunities that don’t involve money may often be the most significant. For example, if you are a busy person with a family, paying the neighbor boy $10 to mow your lawn will seem like an absolute bargain — for only $10, you can spend another hour playing with your kids! If the marginal utility of your leisure time is very high, you will make decisions like that, including even forgoing overtime work if you would rather have the free time than the extra money.

  5. I’ve heard people propose this method before.

    I don’t think it valid. Your free time is valued not in dollars, but in utility. These are not related in a linear manner, as the law of diminishing returns shows.

    The real measure is:

    Total Utility of Alternative A
    versus
    Total Utility of Alternative B

    Total utility is calculated by taking the utility you get from doing the activity (and can be negative in the case of things you actively dislike). You add that to the utility gained from the present financial expense (or income) from performing the activity, as well as to the utility gained in the future from having done the activity.

    Note, this isn’t the amount of dollars, but the utility of them. For instance, the first 20K you earn in a year (assuming typical American level savings) is much more important than the second, which is again much more important than the third.

    Then again, the first day off in a week is the most important, the second day off much more important than the third.

    For instance, you have the choice of writing a website yourself or hiring someone to do it.

    If you do it yourself, your utility gain from this activity is:

    Build a Website Yourself =
    Fun (or Angst) of writing a webpage
    + utility gain of the time you won’t use in the future when building web pages

    Hire someone to build it =
    - Utility of the money it costs to pay the developer
    + utility of building a relationship with someone to do things for you in the future
    + utility of 2nd best use of free time you lose (say playing a Wii or soccer with your kids)

    I’m not saying Trent’s method isn’t useful. It is incredibly useful for comparing *jobs* (although only hints at some areas of the evaluation criteria for those). True hourly rate is a useful metric to aid in calculating the utility of an employment situation. It isn’t the whole picture, you have to go into stuff such as the above to get there.

    –Michael

  6. Sarah says:

    Don’t forget to add in the value of benefits. My job pays half my insurance first year, 75% second and 100% beginning the third year. Not to mention vacation and personal/sick time, 401k matching or any other perks. My check reflects $10 an hour, but if I add all the rest in, that really goes up; a lot more than I would subtract for expenses and extra time.

    Then I figure in that I took this job as a learning experience that contributes to my long-term goals. I work as a legal secretary and I plan to attend law school, so there’s a benefit that really can’t be quantified.

  7. Peter@WMTW says:

    Good discussion. Some of these concepts can be used to figure out what to outsource, a task commonly desired but suprisingly not executed by entrepreneurs.

  8. I think this is a very useful tool especially in the industry I am in. As a direct sales professional as well as a life and business coach it is a great starting point for most people to just gain some awareness around their current situation. Often times people will attach a monetary value as a reason for doing something (like staying at a particular job) – using something like the breakdown above, helps draw attention to the fact that sometimes the perceived monetary gain is not actual. This then allows them to start to branch off into determining the value of a particular activity/expenditure. Just my 2 cents :-)

  9. So, I did a post a while back about figuring out the value of your time, but didn’t go into nearly as much detail as you did.

    Rather I focused on the amount of time spent getting rid of spam –
    http://blog.boxbe.com/email/the-high-cost-of-attention

    but the idea could be applied anywhere as you’ve suggested.

    The biggest point here is that if there are things that you hate to do, look at the value of your time. If you can pay someone else to do it or use a service that cuts the amount of time down to do an activity you hate, you should seriously consider it.

    For example, I hate doing laundry. It’s not so much the sticking it in the washer, then the dryer, it’s the folding and putting away part. Sending my clothes out to a wash and fold for $.75 a pound is a luxury that makes sense to me.

    Great post!

    Cheers,
    Randy

  10. KC Trader says:

    I enjoyed your article. Few people really think or do the math if things are economical such as working at a job that pays you less but cost offset the additional higher income from another position. Relocation to another city if you get transferred in your job comes to mind as well.

  11. Farley says:

    One big factor in my calculation needs to be the retirement contribution my work makes. That is very hard to figure into an hourly wage though.

  12. I could not agree more about the Wash & Fold! Why would you waste an entire day doing laundry yourself when you could just have it done for you. If you spent just a couple of hours doing something to make money it could pay for the washing and then you could spend the rest of the day at the pool!

  13. Ustimenko says:

    I enjoyed your article. Few people really think or do the math if things are economical such as working at a job that pays you less but cost offset the additional higher income from another position. Relocation to another city if you get transferred in your job comes to mind as well.

  14. Matt says:

    I got about $22.25/hour. I took half my car payments, round-trip for gas each day I work, a clothing allotment, half my car insurance and maintenance… and added back the amount I save by not needing to buy COBRA insurance, and added in 5% retirement matching. I also took out 30% for taxes. Before taxes, it’s just over $30/hour. My fiance’ makes the same.

    The driving time and gas hit the hardest, because it’s about 1.25 hours roundtrip each day. But I think this is a reasonable way to calculate your leisure time worth. I’ve always said, I didn’t go to college so I could do manual labor the rest of my life. Now I don’t feel so bad about paying someone else to mow the lawn, do house repairs, etc. I do what I can, but it’s not my competency, so in some respects I’m spreading the wealth :-P

  15. George says:

    There was an article in CNN about an economics professor in the UK who came up with a basic formula for determining a working person’s time-worth for the UK. Based on his formula, We created an online time-worth calculator at theDollarRule.com, for anyone who wants to try it for US-based numbers.

    Obviously, it’s a somewhat generalized figure, so it’s not going to take into account your own specific bills or expenses. But it’s a handy quick estimate and doesn’t require dozens of fields to be filled in. Just your annual income, tax bracket, tax filing status and where you live.

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