Money Toolbox

Spend Less

“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.

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?

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.

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.

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.

Additional Resources

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:

If you’d rather read material on the web, here are some related articles:

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.