This post is kind of long, so here is the main point for the most impatient of you: considering just the dollar hourly return of an activity is not enough. Read on to learn how to properly assess the value of an activity.
The Last Straw
I am going to a concert of a Russian artist this weekend. I am going with a friend and the tickets cost $25 each. А few days ago, I logged into the concert hall's website to purchase tickets for the two of us, happily filled in all the fields and proceeded to checkout. The total was $63.50 with a total of $13.50 in service fees!
Um, what?! Are you serious?! I am not being stingy here or anything, but I was completely outraged by this website's (who shall remain nameless as I do not wish to give it the honor of advertisement) fees. So as an indignant consumer and avid advocate of financial responsibility, I made the trip to the concert hall and bought the tickets in person. Hours spent = 1.5. Dollars saved = $12.50 ($1.50 was spent on bus ride).
As I got home, I happily tweeted the news of my accomplishment out into the world. My new Twitter buddy @PaulTran92 quickly calculated that this project earned me $8.33 per hour. Not so great, is it?
Paul's tweet was exactly the impetus I needed to write this long-overdue post. Listen up, people, you have to learn about yourself to learn how much your time is worth.
How People Tend to Think About the Value of Their Time
I encounter people making this mistake all the time. When my dad deals with annoying things like health insurance reimbursements, fixing something around the house, etc. he always says "I have already spent too much of my time on this. My time is worth a lot of money. I could have just paid someone $200 to fix this and made more money in those two hours I just wasted."
This is flawed reasoning. Really, you can only use this reasoning if you are actually getting paid by the hour and you have a project that is just waiting for you to spend your time on that could generate you positive earnings. Then, yes, the trade-off is between the money you generate through cost saving and the money you could be generating by working on the project. Otherwise, you are comparing apples with oranges!
How People Should Think About the Value of Their Time
Let us face it - most of us do not get paid by the hour (neither does my dad). We are salaried employees. Therefore, we simply would not make more money during the time that we spend on time-consuming cost saving projects. So stop thinking of it in that way. That is not reality!
The good news is that you can think of it in the correct way by slightly adjusting the perception of the value of your time. But for this, you have to invest some time in getting to know yourself and learning what you value.
Let us review with a real example:
During my 1.5 hours spent saving $12.50, I spent:
- 15 minutes of it walking around San Francisco. This allowed me to breathe some fresh air and enjoy my "outside time" of the day.
- An hour on the bus, where I read up on a great explanation of the economic crisis by Robert Solow.
- The remaining 15 minutes I spent waiting for a bus. I called my mom, had a quick conversation and assured her that I was alive and well.
Now, I am not going to put monetary value on those things because I am a practical person and assigning dollars to intangibles has no place in my personal financial infrastructure. But what I will point out is that this is the real trade-off you should be considering; the trade-off between what you "earn" by engaging in cost saving and what would ACTUALLY be doing if you were not engaging in it. It is NOT the $8.33 per hour vs. the $30- or $50- or $80 per hour that you have mentally calculated you earn from your yearly salary and anticipated year-end 2009 bonus.
In my case, I got lucky since it was not a trade-off at all because I was able to save $12.50 and do all the things I would have been doing during that time anyway.
- Learn about what is truly valuable for you to spend your time on.
- Be real about the value of trade-off activities on your time. If you are not actually earning an hourly rate, do not make one up based on your salary and then compare that to the hourly rate you "get" by engaging in an activity that results in actual positive earnings (savings = earnings). Those are apples and oranges.
- Only then, weigh the trade-offs and make the right choice between activities. One that you will not regret because you were real about the value of each to you.
P.S. Please note that during that trip I made $8.33 per hour in after-tax earnings. In fact, it really was $10.42 per hour assuming a conservative 20% income tax rate.