Calculating the Value of Time: How Much Is Your Time Really Worth?

Posted on December 28, 2015 by resourcefulman

Not all uses of time are created equal, and this simple truth can make a big difference in life. Understanding how to make the most of your time starts with knowing exactly what your time is worth. Here’s how to methodically determine the value of your time.

This post originally appeared on James Clear’s blog .

People who spend their time on more lucrative jobs make more money. People who spend their time investing in others improve relationships. People who spend their time building flexible careers enjoy more freedom. People who spend their time working on high-impact projects contribute more to society. Whether you want more wealth, more friendship, more freedom, or more influence, it all depends on how you spend your time.

If you are like me, you probably want what is listed above (friendship, freedom, influence) and others (health). But you can’t have everything at once, so you need to understand how to effectively manage the trade-offs that you face on a day-to-day basis.

This article explains how to determine how much your time is worth and use that information to help you spend your time more efficiently.

The value of time: how much is one hour worth?

A few weeks before I started writing this article, I bought a small travel bag. After a lot of searching, I found one that I liked and for only $ 19, it was very affordable. But there was one problem: the bag was made by a company in the United Kingdom and cost $ 45 to ship to the US.

I was immediately rejected by the idea of paying $ 45 for a $ 19 package, so I looked for retail stores. The company had a physical location in New York and I was already planning to visit the city in a few weeks. I looked for a store and realized that it would take me about an hour to get off the road and stop at the store during the trip.

It was then that I thought about the question that prompted this entire article: “Is one hour of my time worth $ 45?”

Should I save time and pay $ 45 to ship the bag? Or should I save money and spend one hour of my time to pick it up in person? I had no idea if it was better to spend my time and money shopping or paying surcharge for delivery.

The dilemma of time and money

At some level, we all have an internal measure of how much our time is worth. For example, if someone asks you to pay $ 0.07 per hour of work, you will immediately refuse. Meanwhile, if someone asks you to pay $ 7,000 for an hour of work, you agree immediately.

In extreme cases, it’s easy to know if a task is worth your time. However, as you get closer to the middle of the time value range, it becomes less clear whether a particular task is worth your time or not. And therein lies the problem: most of life is lived in the gray zone of the time spectrum.

For instance:

Should you buy a direct flight and save two hours, or buy a connecting flight and save $ 90?
Is it worth paying a neighborhood teen $ 20 to mow your lawn so you have an extra hour for free on the weekend?
Should you spend this week working with a client who will pay you $ 2,000 straight away, or on a business idea that could generate $ 20,000 over the next year?

We make choices like these every day, but most people base their decisions on intuition or guesswork and never calculate how much their time is actually worth. They all have an hourly cost, but very few people can tell you what that number is. Until recently, I was no exception.

How to calculate how much your time is actually worth

My dilemma of time and money prompted me to turn to all the experts I could find on this subject. I’ve talked to entrepreneurs, productivity consultants, coaches, and even professional poker players about how best to determine how much my time is worth and how to make better decisions based on that information.

I then tracked every hour I spent over a three month period and calculated the value of each hour using six different equations. Do not worry. I’ve condensed all of this research and experimentation into a fairly simple process, which I’ll talk about right now.

The rest of the article is divided into two parts.

Part I is quick and easy and covers everything most people might need. Within 15 minutes, Part I will help you make a reasonable estimate of how much your time is worth so you can make better decisions. I recommend everyone to read Part I.
Part II is time consuming but valuable. Part II will be useful for entrepreneurs and managers in particular. Part II builds on Part I and helps you assess the expected value of different uses of time so you can make more informed strategic decisions that will pay off in the long term.

Before we dive into Part I, I’d like to share a free spreadsheet I’ve created with examples of each equation in this article. You can use this spreadsheet to enter your numbers and estimate your time right away. I will refer to this table for the rest of the article. Click here for a copy.

Part I. Methods of realized income

We’ll start by using realized income methods to calculate the value of your time. These calculations are based only on the income actually received (or realized), hence the name “Methods of realized income”. These calculations will help you make the right decisions about how to spend your money on everyday purchases. (i.e. should I pay $ 45 for shipping or should I go to the store?)

To get started, you need two numbers:

The amount of time you spend making money.
The amount of money you will make during this time.

Let’s talk about how to measure these two factors and quickly assess the value of your time.

Step 1. How to track your time

The first step is to measure the total amount of time you invest to make money, not just the hours you physically spend at work. For example, if you spend one hour commuting to work every day and eight hours at work, then you need nine hours to make money that day. Likewise, you should add any time you spent on a part-time job or dropped your kids in kindergarten. Using these numbers, we are trying to get a complete picture of the total amount of time you invest each year to make money.

If you find it difficult to estimate your time, you are not alone. Most people have only a vague idea of what it takes 24 hours of each day. If you don’t know how much time you are spending on work, I recommend using 2,500 hours per year as a starting point.

Here’s why: Let’s say you spend 10 hours a day at work, commuting to work, or doing work-related tasks. With a five-day work week, that’s 50 hours a week. And if you work 50 weeks a year (2 weeks of vacation), then that’s 2,500 hours a year. I’ll give you the option to make changes based on your specific circumstances, but for most full-time employees or entrepreneurs, I think 2,500 hours is the right choice.

Tracking time: how I did it

As an online entrepreneur, I spend most of my time on the computer. When I started measuring my time, I installed a software tool called RescueTime . RescueTime records the exact amount of time I spend on each task: how much time I spend reading each website, using each program, browsing social media, etc.

After collecting three months of data, I collected numbers from other apps to round up my estimates. For example, I summarized all the time I listened to Audible to estimate how much time I spent “reading” the books.

Using the numbers from RescueTime and some reasonable estimates, I found myself spending about 2,742 hours a year working.

Thanks to the categorization of RescueTime into categories, I was also able to group my time into specific areas such as writing, reading, website design, marketing, etc. This detailed breakdown is not necessary, but will come in handy in the second part of this article. … At this point, all you need is a reasonable estimate of the total hours you spend to make money each year.

Step 2: How to Track How Much Money You Make

The second factor you need to know is how much money you have made in your time at work.

It’s pretty straightforward. If you work hourly or as a wage earner, just look at your last paycheck and multiply it by the number of paychecks you receive per year. If your wages haven’t changed much this year, you can also look at your tax return for last year and just use that number. You should also include money from the side hustle and bustle and freelancers because the time you spent doing these activities is included in Step 1.

The number we’re trying to figure out is your home wage. This is the amount of money you have left after deducting taxes. For most employees, taxes are withheld from your salary, so the salary you receive is basically what you get paid. However, if you are a business owner, you should deduct taxes and business expenses from your proceeds.

Money Tracking: How I Did It

I use Bench Accounting to keep track of my business’s income and expenses. Bench is an online accounting service that automatically pulls data from my business accounts and then the accountant compiles everything into tax-ready financial statements. With a few clicks, I can see how much money I made in the previous month, quarter or year.

If you are also a small business owner, freelancer, or entrepreneur, I recommend using annual income for these calculations, because small business income can fluctuate (sometimes dramatically) from month to month. Analyzing your income over a longer period of time helps to smooth out these discrepancies and provide a more realistic estimate of your time.

Step 3. Calculate the value of your time

Finally, divide the total money earned (step 2) by the total time spent (step 1).

For example, let’s say you spend 2,500 hours a year making money:

If you make $ 12,316 per year, your time will be $ 4.93 per hour. This is the poverty line for a person in the United States in 2014.
If you make $ 46,226 per year, your time will be $ 18.49 per hour. This is the 2014 median income of women in the United States.
If you make $ 62,455 a year, your time will be $ 24.98 an hour. This is the 2014 median income for men in the United States.
If you make $ 100,000 a year, your time will be $ 40 an hour.
If you make $ 1,000,000 a year, your time will be $ 400 an hour.

Again, all of these numbers assume that you are working 2,500 hours a year. Obviously, the numbers will change if you work more or less hours.

Are these numbers accurate?

When I first calculated these numbers, I was surprised. The value of an hour of my time was much lower than I thought.

Think how many freelancers charge $ 40 an hour but don’t make $ 100,000 a year. Or consider how many consultants charge $ 400 an hour but don’t make $ 1,000,000 a year. How can it be? The answer is that these people are only paid $ 40 an hour or $ 400 an hour for some hours, not all hours. When we divide their total income by the total time spent on work, the value of each hour is much less than what they charge for a given hour of working with the client.

Moreover, while we may know how much we will charge per hour, we rarely calculate how long it takes to make money outside of business hours. Considering all the time we invest to make money, we get a clearer idea of what our time is really worth – and usually much less than what you would spend in an hour of work at your job.

Now, if you are like me, you want to test the accuracy of this first calculation. There are some quick ways to check if your hourly cost is correct. Let’s take a look at them now.

Checks and balances

The method we just used to calculate the value of your time is called pay to house method because it is based on the payment you receive. There are two other types of income realization methods that we can use to test the accuracy of your home payment method. I’ll explain them briefly below, but I think the easiest way to understand them is to look at the examples in Step 3 of the time value spreadsheet .

Market Bet Method – The Market Bet Method is the first way to test your numbers. The market rate method is the rate you would expect to receive if you were hired by another company to do a job for which you were qualified. For example, I spend a lot of time writing articles, so I could be hired as a “content creator”. I also spend time developing the business, so I could probably be hired for a business development position. I looked at the salary for each position I was qualified for and then divided it by the number of hours I work to get another estimate of the value of my time. You can think of this method as how much your time in the job market is worth.

The Costly Method – The Costly Method is another way to test your numbers. The cost method is the rate that you would pay someone else to do the work you do. In other words, pretend that you are the boss and you need to hire someone to do your job. I started by dividing my work into specific tasks (writing, marketing, etc.) and estimating the amount of time I spent on each task. I then included what I would be willing to pay someone to do this full-time task. Then I calculated the weighted average of all tasks to get the total rate that I would be willing to pay someone for what I do every day. Finally, I divided what I was willing to pay by the total hours worked.

When I have numbers for all three methods, I calculate the average of my time. I suppose I can give high scores for one method or low scores for another, but the value of my time is likely to be accurate if we take the average of all three methods. Again, you can see each method in the time value table .

How to use this information

We have completed Part I. Using the above calculations, we were able to quickly and accurately estimate how much your time is worth. Now we can narrow the area of uncertainty and make better decisions.

For instance:

If you know your time is worth $ 25 an hour, you should never wait in line for 30 minutes to receive a $ 10 gift card.
If you know your time is worth $ 60 an hour, you should always pay $ 49 shipping and not spend one hour shopping at the store.
If you know your time is $ 80 an hour, you should always buy a direct flight that will save you two hours, even if it costs $ 150 more than a connecting flight.

Once you know in dollars and cents how much an hour of your time is really worth, you can make better decisions every day.

At this point, we know that your time is at least worth the amount you calculated in Part I, because the Realized Income Methods only account for income you have already earned. Ready to see if your time is really worth more? Let’s dive into the second part.

Part II: Expected Value Methods

This brings us to the second way of calculating the value of your time: expected value methods. These calculations are based on the value you expect to receive from a given hour of work over the long term.

Expected value methods can help you make important strategic decisions about where to spend your time. What projects should the business focus on this year? What uses of time are ineffective and should be excluded from everyday work? Is it worth starting a business that could pay off in ten years, but not immediately make money or get a stable job with a reliable income? What’s the best way to deal with these trade-offs?

Let’s start with the simplest type of expected cost method.

Multiple growth method

There is an easy way to account for the expected value of your decisions. Take your previous year’s net income and multiply it by a reasonable growth rate.

The key, of course, is choosing a reasonable growth multiple. For example, my business has doubled from last year to this year, so I chose 2x the growth rate. With this method, we are essentially saying, “Your actions this year will continue to drive growth over the next 12 months, so the true value of your time is actually higher than your realized income today.”

Multiple growth is an easy way to gauge how the work you do today will pay off in the long run, but it doesn’t tell you how to use your time more effectively. To do this, we need to use the full expected value method.

Expected value method

The expected value method is the last and most difficult way to calculate the value of your time. I’ll try to explain it as simply as possible, but I think the easiest way to understand it is to look at the calculations in step 4 of the time value table .

Here’s the basic logic:

Start by breaking down the timeout by task. The more detail you can provide about each use of time, the better you can identify which areas are providing the most benefit.
Find a unit of measure that links the tasks you are working on to the income you receive. For most business owners, this means that you need to know the value of a lead in your business. In my particular case, I am using email subscribers because I know the average lifetime value of a new email subscriber, and most of my tasks can be related in some way to getting more email subscribers.
Estimate the value of each task. Let’s say I spent one hour working on a task that resulted in 50 new email subscribers. If the lifetime value of each subscriber is $ 1, then the expected value for this task is $ 50 per hour. Repeat this type of expected value estimate for each task you are working on.
Add all the expected values together to determine the total expected value of your time.
Add additional variables if desired. Expected value methods can be as complex as you want them to be. You can consider factors such as how much happiness a particular task brings to your life, or how likely it is that that hour of work will continue to bear fruit over the years.

The calculation of the expected value is very individual, and you may have to puzzle over the equations for a while to get them to work for you. Again, I think it is easiest to see this in numerical form. You can see all the factors involved in this calculation in step 4 of the time value table .

Additional Notes

There are a lot of unnecessary thoughts going on behind the scenes of these calculations. Here are a few additional factors that I keep in mind when assessing the value of my time.

False Success – Don’t waste your time trying to be successful at the wrong thing. A simple understanding of the value of your time is helpful, but you need to know what you want out of life in order to get the most accurate picture of the value of your time. Too many people are chasing money, power, or approval because everyone else is doing the same. What if this is not what you really want? Sure, you can find ways to add value to your time, but what if you would rather have more free time than more money? This is where it can be useful to know your core values , write an integrity report, and figure out what matters most to you.

Compromises and opportunistic additions – Bill Gates has been named the richest man in the world more than a dozen times. In 2015, it was ranked # 1 again with a net worth of $ 72.7 billion. According to one analyst, “At $ 72 billion, a 6% return would have earned Gates roughly $ 114.16 a second while alive, making it a poor investment for Bill Gates to work hard to pick up a $ 100 bill if he drops it. … “

While interesting and cited, the idea that Gates shouldn’t bend over and pick up a $ 100 bill from the ground is incorrect. Why? Because getting a $ 100 bill doesn’t stop Gates from making $ 114.16 at the same time. He will be paid whether he takes the $ 100 bill or not. In fact, by making $ 100, Gates will make $ 214.16 in that particular second instead of his usual $ 114.16.

Buying a $ 100 bill is not a compromise that stops Bill Gates from making money. This is a beneficial addition to the money already earned. Opportunistic addition refers to a choice that will reduce the value of your time if you spend all of your time on it, but increase the value of your time if you do it during opportunistic moments. For example, consider an author who also gives speeches. If they spent all of their time talking, they would diminish the value of their time, because they would not write new books, they would gradually fade away and their speaking speed would decrease. However, by giving speeches from time to time – say, once or twice a month – many authors can add thousands of dollars to their profits while still having enough time to write new books.

Free time not subject to discussion. One of the dangers of calculating the value of your time is that you end up convincing yourself to work out another “productive” hour to increase the overall value of your time. According to an article in the Wall Street Journal : “Some researchers say that appropriating time for the economic value of time risks worsening people’s quality of life. Those who are encouraged to focus solely on the dollar value of time tend to feel impatient and pressured, says Jeffrey Pfeffer, professor of organizational behavior at Stanford Graduate School of Business. They work harder and spend less time on rewarding activities like volunteering or music. ”

For my part, I decided that I would track my free time to find out how many hours I use for rest and work, but I was not going to estimate this time in dollar terms. Instead, I decided to say that my free time is non-negotiable. Having free hours when I could sit back and relax allowed me to work effectively during the rest of my work time. You should value the free time, downtime, and leisurely activities that keep your life healthy and well-being.

Do you have to work another hour? – Want to work another hour? Here’s a good rule of thumb I learned from Sebastian Marshall : Count every hour of your day. From 9:00 to 10:00, from 10:00 to 11:00, and so on. Are you making, on average, positive or negative decisions during this hour? For example, if you work late, does the average time between 9:00 pm and 10:00 pm result in positive results? Or are there more mistakes than achievements at this hour? Is this hour more procrastination than productivity? If the average is a net negative hour, you should stop working. Working hard on a project is good, until the next hour of work burns you out more than it produces anything of value.

Happiness and meaning – If you want, you can factor in factors such as how much happiness or meaning a task adds to your life. However, instead of including these variables in my actual equation, I decided to rank them for each task from 1 to 10 based on how well it performed for me. I have not used these ratings in any equations, but they can act as a resolution of conflicts between tasks that are close in expected value.

Where to go from here

Calculating the true value of your time is actually much more difficult than it sounds, and much more effective than it seems.

The value of your time will likely change every year, and maybe even faster. The techniques I have outlined in this article are flexible and adaptable. As you spend more time in a particular area or earn more income, you can simply insert new numbers into a spreadsheet and get an updated value for your time.

I hope that the strategy I have shared here will be useful to you over time.

The value of time: how much is time really worth? | James Clear

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