Figuring out how much your time is worth–does it make sense?

Question:

What’s the best way to value your time? I am trying to make a decision about whether to hire help for my house.

My answer:

There are many ways to figure out how much your time is worth. You can get a quick estimate of your hourly rate by taking your salary and dividing by 2,000 (typical yearly hours for a full-time job). Or if you want to be more precise, you can go use MSN’s calculator, or one of a dozen other methods. But before you get going you have to ask yourself: does the question even make sense?

In theory, knowing the value of your time should help. Many decisions are a tradeoff of money and time. Things like cooking versus dining out or cleaning versus hiring help look like questions of time versus money. If you don’t have money, then there is no question you need to do the work. But if you do have money, what’s the appropriate tradeoff-at what point does it make sense to hire outside help?

It turns out such a question is flawed to begin with. Virtually no decision is as simple as trading money for time. Take cooking versus dining out. With cooking, you have a smaller cash outlay but a higher time outlay in shopping for food, preparing and cooking, and then cleaning up. People usually value time greatly, so under many of time calculators, it doesn’t make sense to cook at home.

And yet this is why the analysis is problematic. Cooking at home has many other benefits. You get to choose your food quality. You can prepare it in any way you like. You dine on your table, and can accompany it with your music or your entertainment. And you never have to wait to get seated. Dining out has many intangibles too. You can eat food you cannot prepare yourself, or you can order a different food item than your dining companion. It is really hard to quantify any of these important factors.

And yet most people like to base such decisions on how much their time is worth. Why?

To borrow a phrase from my good friend, it’s because people like to hear good things about their bad habits. It takes a good amount of initiative to start things yourself, so if you value your time high enough, then you can justify hiring help for nearly anything. This is why so many people eat out, hire help for cleaning, and outsource all sorts of unnecessary things. These aren’t always bad decisions, but many people make them with a false sense of being right. These are lifestyle decisions and are good candidates for saving if you’re in money trouble.

I will be clear that I don’t fault time analyses completely. But I think they are most useful in business settings. If you need to chose between (A) spending 10 hours photocopying or (B) spending $100 for help so you can bill $1,000 to a client, then go ahead and outsource.

But in personal finance, there is so much more going on. It’s a multivariate optimization of all of your earnings versus all of your spending. Decisions should be holistic. The basic problem with value of time analyses is that we usually can’t trade time for money. If I order out instead of cooking, then I’ll likely spend my time savings on watching sports on TV.

So what’s the right way to make decisions about time?

I think the first step is analyzing just how much free time you have. One way to do this is to take your week and subtract all the fixed hours on commuting, working, and other necessary activities (see one calculation for a consultant.) In such an exercise, this consultant has only about 10 hours of personal time per week. Now it’s easy to see time is very valuable–each hour represents 10 percent of leisure time. It doesn’t make sense to wait for restaurant seating or do other less important things. Giving up one hour can mean a lot. It’s a reason to consider outsourcing.

The next step is figuring out if you can afford the change. One of the best ways to do this is by tracking your expenses. This is an exercise where you track all your income and compare it to your total spending-on taxes, food, entertainment, housing, etc. By seeing how much money you have saved, you can make much better decisions about whether you should hire outside help. (To get started, check out my free “spreadsheet to track your expenses” on the financial tools page).

What’s your take on valuing time?

Do you have a question?

If you’d like to hear my thoughts on a money or game theory question, please feel free to email me at presh@mindyourdecisions.com. I will publish the best questions on this website. I may edit the question to make it more general. Please understand I cannot answer all emails due to time constraints.



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  • Eyal

    I like the idea of measuring only spare time. I think that you should also measure only spare money. Here are some contrived scenarios where I think that you just break even:

    You get a job that pays an extra $30 per week but it means an extra hour of commuting per week. You hire a housekeeper for $30 per hour. Break even?

    You get a raise that increases your after-tax earnings by $500/mo, but your rent goes up $500/mo. Break even?

    Basically your “true income” is a function of how much time and money you have left over at the end of the month. You can trade one in for the other. Both seems to have non-linear value, too. Your only free hour of the week is worth more than if you have lots of spare time in the week. If you can save $100 per month, you can go skiing once a year. If you save another $100 per month, you can go twice. But if you save $100 less per month (0), you never ever go.

  • http://www.mindyourdecisions.com/blog/ Presh Talwalkar

    Eyal:
    This is a very insightful comment. I think people would make a lot better decisions by comparing spare time versus spare money.

    I’d like to add some thoughts to your interesting hypothetical situations:

    1. This is a good example of why it’s not the best idea to compare time versus money. Probably the biggest factor in the situation would be how different the new job is on a personal satisfaction level. One of the things I most abhor is needing to pay extra money for time lost spent earning extra money. That is truly a rat race!

    2. This might be a break-even as it compares money to money. But since many companies give pre-tax benefits, like 401(k) matches, it’s hard to even experience this situation. You’ll usually end up ahead.

    You’re right about the diminishing marginal utility on time. The first hour of leisure is the best.

  • Simon Dedman

    Interesting stuff.
    The salary/2000 is a useful rule of thumb but since most people (I assume?) will use their pre-taxed figure, this may give an irrelevant figure. Take your total after-tax figure, remove all your yearly bills (rent, fuel, etc) then divide by (356*your nightly leisure hours) to get your earnings-per-leisure-hour figure [E]. (n.b. not adjusted for weekends, so needs tweaking).

    Next, identify discrete items e.g. cleaning, cooking, walking dog, whatever, and rate them on quality. Quality*Time will allow for item comparisons, and QT/E should allow you to determine time/cost comparisons. Some things you can’t remove (e.g. eating) but most will be eligible for comparison scrutiny.

    Presh, you wanna take a stab at a formula?

    Problem: you earn X/yr after tax & all regulars (not food) and have Y hours free/night. You hate dishwashing. If it takes 0.5hrs to handwash @ Q=10% and 0.2hrs to dishwash @ Q=25%, how much does a dishwasher have to cost (total lifetime cost) to be worth buying?

  • http://www.mindyourdecisions.com/blog/ Presh Talwalkar

    I like your modifications, but perhaps this is a bit too cumbersome for everyday use since we have too many decisions to make…who wants to rank the 1,000′s of outsourcing decisions we have to make? Of course if a computer could do it that would be something else (perhaps this is the next step for a site like Mint.com or Wesabe…)

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