“Time is money,” my father used to say when I was a boy. He didn’t like how I dawdled while doing my chores. “Time is money.” I didn’t understand what he meant back then. To me, time and money were two very different things. As a kid, I had lots of time but very little money.
Today, after writing about finance for fifteen years, I get it. Dad was right. Sure, there are some differences between the two – money is renewable and time is not, for instance – but in many real ways time is money – and money is time.
This concept is the central lesson in the personal-finance classic Your Money or Your Life by Joe Dominguez and Vicki Robin. “Money is something we choose to trade our life energy for,” they write. “You are the one who determines what money is worth to you. It is your life energy. You ‘pay’ for money with your time. You choose how to spend it.”
Maybe all this talk about “life energy” seems strange to you – a little woo-woo. Think of it like this. When you work, you’re turning your time into money You work 40 hours a week at the office, then those 40 hours become $1000 when you get your paycheck. Now you can use this $1000 to buy things. There’s a transitive law at work here. Time becomes money, and money becomes stuff.
Thinking like this has some powerful implications.
- When you treat time as money (and money as time), you can better decide how to allocate both your dollars and your hours.
- When you know how much your time is worth, you can decide when it makes sense to “outsource” specific jobs, such as housekeeping or car repair.
- When you spend less, you can work less. Frugality allows you to buy back your time. But on a deeper level, frugality also allows you to buy freedom – financial freedom, freedom from worry, and freedom to use your time however you choose.
Because of the time factor, you don’t earn as much as you think. You may be paid $30 per hour, but your true hourly wage is much less than that. Possibly much less.
Your True Hourly Wage
Let’s say you have a friend named Joe and that he’s a plumber. Joe currently makes the national average for his profession, about $58,000 per year. His nominal wage is roughly $28 per hour.
Based on these numbers, if Joe the Plumber were to buy a $500 laptop computer, he’d need to work eighteen hours to pay for it. He’d be exchanging eighteen hours of his time for that computer.
Ah, but it’s not quite that simple. Joe’s true hourly wage isn’t $28 – it’s something lower.
Think about your job. Think of all the time and the money you spend because of this job. How long does it take to drive to the office? How much does gas cost? Are you required to own a suit or a uniform? Do you need specialized tools? Are your eating habits different at the office than they would be at home? Does your job cause physical or mental stress?
My girlfriend, for instance, is a dental hygienist. She commutes an hour a day. She wears scrubs to work, so that’s an added expense. She had to buy her own set of dental instruments. And the work is hard on her body. Bending over to clean people’s teeth for ten hours a day has messed up her back. When the pain gets bad, she pays to have massage therapist work things out. These are all added costs that decrease her true hourly wage.
What kinds of costs might your friend Joe the Plumber incur with his work?
- Well, there’s commuting. Let’s assume Joe’s office is twenty miles from home. It takes thirty minutes to get there. Every day, he spends an hour driving to and from work in his pickup truck, which – according to the American Automobile Association – costs him about 72 cents per mile. Joe commutes 200 miles per week, which sets him back five hours and $144.
- It doesn’t cost Joe extra time to get dressed for work in the morning, but it does cost him a bit of extra money. Several times each year, he has to buy new work clothes because his old ones wear out, especially the knees of his jeans. Let’s say he spends $500 annually on work clothes.
- If Joe is money conscious, he probably takes his lunch to work. But let’s be real. From time to time – especially if he’s working with a partner – Joe will stop to grab a burger or sandwich while on the go. I think it’s reasonable to say that he spends an average of one hour and $5 each day on lunch.
Each week, Joe’s job costs him about ten extra hours for his travel time and lunch breaks. That’s 500 hours per year. He’s also shelling out around $180 every week on job-related expenses, or roughly $9000 per year.
Now that Joe knows how much time and money he spends on the job, he can compute his true hourly wage.
- First, Joe subtracts his work-related expenses from his annual salary to find his actual earnings. He takes his $58,000 salary and subtracts the $9000 he spends each year on job-related expenses to find he’s actually earning $49,000 per year.
- Next, he calculates the total time he uses for work. Joe leaves the house at 6:30 every morning and doesn’t return until 4:30 in the afternoon, which means he’s devoting 50 hours to work each week, or about 2500 hours per year.
- Finally, Joe divides his true earnings – $49,000 per year – by the total number of hours he spends on work-related tasks – 2500 hours per year. This number is his true hourly wage, which turns out to be $19.60, which is much lower than the $28 per hour he thinks he’s earning.
So, that $500 laptop computer doesn’t cost Joe eighteen hours of work; it costs him 25 hours of work. To earn money for anything he wants to purchase, Joe has to spend 40% more time on the job than he believes he does.
But wait! It gets worse! Joes’ $28 hourly wage is a pre-tax number, but his spending is after-tax money. Joe’s income is close to the average American income, so let’s assume that his tax burden is roughly average too. His effective tax rate is 30%, which is the total amount he pays for all taxes.
Joe’s true hourly wage before taxes is $19.60 per hour. His actual true hourly wage after taxes is something like $12.08. That’s less than half his nominal hourly wage. That new laptop computer will cost Joe just over 41 hours of work – an entire week. I hope it’s worth it!
This example may seem extreme but it’s not. It’s actually fairly average. It’s representative of the normal person’s true hourly wage – and how much time they trade to buy things.
Spend Less, Live More
One of the cruel ironies of this modern life is that the mass of people – those still trapped in the Matrix – spend thousands of hours working each year so that they can buy more stuff – stuff that costs more than they think – yet they never set anything aside for the future. When most people get more money – through a raise or a windfall – they spend it. As a result, they have to keep working. They’re stuck on a sort of treadmill. They’re running and running but they never get anywhere.
We’ve become a nation of consumers. To paraphrase the movie Fight Club, we’re the by-products of a society obsessed with having more, more, more. But in many ways, you don’t own the things you buy. As the film says, “the things you own end up owning you”.
To remove yourself from this hedonic treadmill – to escape the Matrix – reduce your spending. Opt out of the consumer lifestyle. Reduced spending provides two benefits for this on the quest for financial independence.
- First, when you decrease your standard of living, it takes less money (and less time) to fund it. If you earn $50,000 per year after taxes and you’re spending $50,000, there’s no margin for error. If something goes wrong – you lose your job, your kid gets cancer – then you’re in a bind. But if you cut spending to $40,000 per year, you create options. You can choose to continue earning $50,000 and bank the difference (thereby building a store of time), or you can choose to work less today, taking advantage of the time savings immediately.
- Second, spending less makes it easier to fund your future. With a less-expensive lifestyle, you don’t have to save as much for retirement. If you spend $50,000 per year, then you need roughly $1.25 million to become financially independent. But if you spend $40,000 per year, your saving target drops to around $1 million.
Here’s the key takeaway: When you spend less, you can work less and live more.
Ultimately, there’s a balance to be had, and that balance is different for each of us. You have to decide the level of comfort that’s right for your life. There’s no right or wrong. But you have to be willing to pay the price for the lifestyle you choose.
Finally, here’s a list of additional resources if you’d like to learn more about the concepts in this lecture. First up, here are some books on this topic:
- Your Money or Your Life by Joe Dominguez and Vicki Robin
- The Millionaire Next Door by Thomas Stanley and William Danko
- Financing the American Dream by Lendol Calder
- The Snowball: Warren Buffett and the Business of Life by Alice Schroeder
If you’d rather read material on the web, here are some related articles:
- The website of author Vicki Robin.
- How to Compute Your TRUE Hourly Wage at Get Rich Slowly
- A Real Millionaire Next Door at Get Rich Slowly
- An Interview with the Real Millionaire Next Door at Get Rich Slowly
- Another Visit with the Real Millionaire Next Door at Get Rich Slowly
- Stealth Wealth: Why True Wealth is Best Kept to Yourself at Wallet Hacks
- 2018 Consumer Expenditure Survey from. the U.S. Bureau of Labor Statistics
- A Brief History of U.S. Homeownership at Get Rich Slowly
- Opportunity Costs and Conscious Spending at Get Rich Slowly
- Renting is Throwing Money Away…Right? at Afford Anything
- The New York Times Rent vs. Buy Calculator
And don’t forget: If you’d like some general resources for financial independence and early retirement, I’ve created a page here at Money Toolbox that links to useful FIRE apps and tools.