Recognizing that your time is valuable is the first step toward building a highly successful and efficient business or real estate portfolio. The second step is to figure out how you can build systems that remove you from low value tasks and allow you to focus solely on the high value tasks. Investors who focus on the tasks that bring in the most value will build the greatest empires.
Everyone’s time is valuable, but to varying degrees. Today’s article will show you why knowing the value of your time is important, how to measure it, and how time savings can come into play. We’ll also touch on non-monetary value.
Discussing these topics will allow you to gain great insight into your own perception of the value of your time. You will be empowered to say “no” when low value opportunities come up. You will look at cost versus value-add completely differently, and you will begin to focus on automating the lowest value functions of your business.
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Why You Should Care How Much Your Time is Worth
Understanding how much your time is worth is crucial for any sort of decision making, whether business or personal in nature. If you know that the value of your time is $50 per hour, you will say “no” to opportunities that offer $40 per hour. Similarly, if the non-monetary value (discussed later) of an activity or product is less than the value of your time, you can easily say “no.”
Knowing the value of your time aids your decision-making process and allows you to focus on activities that bring in higher value than you’ve determined your time is worth. Knowing the value of your time also allows you to effectively price your services, negotiate salary, and engage in high value activities, even if we can’t assign a monetary value.
Great examples of people who may not understand the value of their time are those that stand in line for free stuff. For instance, I once saw a very well-known chicken sandwich chain giving away free sandwiches. All you had to do was show up. People came in droves, lined up, and stood there for an hour waiting to be served their free sandwich. These people inherently valued their time at $3.99 an hour.
People who understand the value of their time will not be caught in that free sandwich line unless there is some non-monetary value to be gained, such as socializing with friends. If they are craving a sandwich, they’ll just pay the $3.99 rather than wait in the long line to get it for free.
Another example is one that I’ve used personally in my business. I know what my time is worth today, but I also have goals on what I want my time to be worth in the future. This not only allows me to price my services more effectively, but it also allows me to be more selective with the clients I choose to take on.
I’ve moved away from “taking on anyone and everyone” to defining a target client and only taking on that type of client. This is because the type of client I’m targeting will place a higher value on my time.
How the Value of Time Applies to Real Estate Investing
Knowing the value of your time can help you in your real estate investing as well. For instance, if your time is worth $50 per hour and it’s going to take you four hours to fix broken pipes at your rental property, you may be inclined to pay a plumber $150 to fix the problem. Or you pay a plumber $45 per hour. Both outcomes result in you monetarily gaining from your decision to outsource the work.
But if you don’t know the value of your time, you’ll become the classic do-it-yourself landlord and business owner. You won’t focus your time on the highest valued activities. You’ll focus squarely on your savings in lump-sum dollar terms. This is a bad way to run a business.
Recently, Mindy (whom I greatly respect) wrote about reasons you will likely always be poor. One of those reasons was that you hire out all your work. Conversely, I think that if you are doing it all yourself, you will always be poor. There are many real-life examples of my theory as well.
How many wealthy individuals do you see doing all the work themselves? How many poor people do you see doing all the work themselves? My point exactly.
Her reasoning doesn’t really address the root issue, though, which is how you value your time. If you are able to hire out your work at less than the hourly rate of which your time is worth, then you hire it out. It’s a simple concept, but tough in practice. As encouragement, Richard Branson doesn’t even do his own laundry!
How to Determine and Measure Value
Everyone should know, at least on a basic level, what the value of an hour is to them. A relatively easy way to calculate the value of a work hour is to simply take your gross income and divide it by 2,080 hours. This will tell you the gross value of each of your working hours assuming a 40 hour work week.
I use gross income and 40 hours per week because it’s a very easy and quick calculation that can be applied universally. It’s comparable because virtually everyone works, in some capacity, at least 40 hours a week.
If you want to take it a step further, you can divide your gross income by your average daily “awake” hours. I recommend you run this calculation as well, but keep in mind that non-monetary value (which we will discuss shortly) comes into play, which makes this calculation convoluted. At the very least, it will provide you with a quantitative value that you can always keep in your mind for future reference.
Taking it further still, obviously everyone has a different tax position, and your unique tax position should be taken into consideration. An employee who generates $100,000 will theoretically pay less in taxes than a business owner who generates the same amount. So the post-tax value per hour is an important consideration.
As an example, a business owner filing single who grosses $150,000 per year, nets $100,000 per year, and sleeps seven hours a day on average will result in the following:
Gross value per working hour: $72.11 ($150,000/2,080 hours)
Net value per working hour: $48.08 ($100,000/2,080 hours)
Gross value per awake hour: $24.17 ($150,000/6,205 hours)
Net value per awake hour: $16.12 ($100,000/6,205 hours)
Post-tax value per working hour: $32.68 (($100,000 – [Federal Tax: $17,888] – [Self-Employment Tax: $14,130]/2,080)
Post-tax value per awake hour: $10.96 (($100,000 – [Federal Tax: $17,888] – [Self-Employment Tax: $14,130]/6,205)
As you can see, the results vary drastically depending on the variables. They can all be used separately in different ways. For instance, if you are a growing business, you may be focused on the “top line,” which means you should emphasize growing your gross values through increased sales. If you are leveling off and focused on building a sustainable business, you should be focused on saving time or money, your “bottom line” or net values.
In business, I use the gross value per working hour to make decisions. This is because most opportunities are presented on gross value terms, making it quite easy to compare the value of my time per opportunity.
On a personal level, I know exactly what my post-tax value per awake hour is purely for motivational purposes. If I know I’m burning a potential $xx per hour, I’m going to be motivated to make something of that hour, even if it’s 10:00 a.m. on Sunday.
I recently read an article that advised readers to remind themselves constantly that they could die within the next few moments, days, weeks, months, etc. The purpose of this practice is to inspire action. If you know a deadline is coming up, you’ll be motivated to crush it.
I take a less morbid view that works better for my financial mind. Since you are a real estate investor or a business owner, my method will likely work for you, too. And that’s to simply understand your post-tax value per awake hour and always focus on gaining more value than your post-tax value per awake hour is worth.
A hundred thousand dollars seems like a lot of money, and it is indeed a solid chunk of change. But when you put it on a post-tax per awake hour perspective, $10.96 really isn’t a whole lot. What would happen if you can increase it by 50%? Double it? Surely it can’t be that hard.
That’s the mindset I use this for. Instead of saying, “I need to make more sales to hit $100k,” I say “I need the value of my hour to increase by 200%.” This allows me to focus on a smaller, seemingly easier number to manage. It pushes me to work as efficiently as possible to boost that number and only engage in value-add opportunities or activities. Time is money.
Saving Time Adds Value
We can talk in terms of dollars all day long, but the value of your time is also affected by how much time you spend working in any given area. So while I push people to focus on expanding incomes, there comes a point where we should switch gears and focus on efficiency instead.
Remember, in our value per hour equation, the numerator is expressed in dollars, and the denominator is expressed in hours. If we decrease the denominator, we increase the value of our hour.
For instance, a person making $100,000 per year in net income and working 2,080 hours has a value per hour of $48.08. But if that person can implement systems that make the working hour more efficient and save 100 hours per year, their value per hour increases to $50.51.
When should you start focusing on efficiencies? I’m honestly not sure. There is an economic concept called the “diminishing marginal returns,” which essentially means each additional dollar you earn decreases in value to the earner.
This can be best illustrated by the fact that when you eat one cheeseburger, it’s delicious. But when you eat several in a row, the next one you eat is less delicious as your body begins to send signals to your brain that you are getting full.
At some point, earning another dollar will not bring you as much value as figuring out how to save time. At that point, you will want to focus on becoming the most efficient business around. Adhere to the 4-Hour Workweek mindset and figure out how you can outsource as much as possible.
Not only will you decrease the denominator (time), thereby increasing your value on an hourly basis, but you’ll also get to focus on ever-increasing valuable tasks. And one day soon, you’ll be focused solely on the highest value tasks, which will maximize your value per hour.
Understanding Non-Monetary Value
The majority of “things” in this world bring value to someone, somewhere. In your life, even if you can’t quantify the value, it doesn’t mean that such value does not exist.
As you may or may not know, I’m a big proponent for expanding one’s income rather than spending time and energy focusing on living an extremely frugal life. The practice of saving money is great, but people who blindly follow frugality are not only missing out on life, but also missing out on intangible value.
For instance, I frequently visit my local coffee shop and purchase a $5 latte. The latte provides value, such as energy and uplift in mood. It provides convenience. It provides sociability, interaction, and networking opportunities. It provides a change from the daily routine.
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If I cut the latte out of my routine, I’d save $5 per trip, but I also wouldn’t benefit from the non-monetary value the latte trip provides. For me, that value is worth more than the $5 in my pocket.
The point is that non-monetary value is tied to virtually every product or service we buy. Common measures can be your change in mood or ability to build new relationships. But quantifying that value is extremely difficult, if not impossible. I haven’t figured out how to quantify non-monetary value, but maybe that’s not such a bad thing.
Which leads me back to the values we were calculating earlier. While it’s great to know what your post-tax value per awake hour is, it may not be that helpful in the grand scheme of things. This is because our non-working hours are chock full of non-monetary value-added experiences.
Hiking, running, swimming, and cycling will all add value to your life. But you’d have a tough time calculating how much value has been added.
So how can you use this in tandem with calculating your value per hour? By shifting your mindset.
If you are clearly participating in a non-value add activity, then not only are you losing the potential to gain non-monetary value, but you are also losing the opportunity to earn the hourly value that you’ve calculated you’re worth. It’s like a negative double whammy.
Success-oriented people think about their lives in this manner. They don’t waste time on non-value add activities, but they know non-monetary value exists and that constantly pounding the pavement looking for deals isn’t necessarily the best way to live.
So now you know why it’s important to understand your value, how to calculate it, and that non-monetary value exists in virtually everything we do.
My hope is that you will use this information to become more productive. I use it to maintain laser focus in achieving my goals. When I start wasting time with a non-value add activity, I remind myself that my time is worth much more than what I’m currently valuing it at.
That mindset has helped me grow a rental portfolio and a business that far exceeds the income I ever expected to earn.
Have you ever calculated how much your time is worth? What are you doing to up your time value?
Leave your comments below!