How Much Is Your Time Worth?
We all make hundreds of decisions every single day, whether we realize it or not. You decide to get out of bed, turn left in traffic, and even to pay your bills. Most of these decisions are automatic, sure. If they weren’t we’d all go insane.
You also make decisions about what to spend your money on. A lot of these decisions are automatic as well. You do them because you know you have to, or because you always have.
But how can you know if you’re making the right decisions? How do you decide that something is worth your money? More importantly, how do you decide that something is worth your time?
You can always make more money. Sometimes it doesn’t feel that way, but it’s true. But there’s no way you can twist the theory to make more time (sorry, Einstein). We all get the exact same amount.
This post is all about developing a simple framework you can use to determine your hourly rate. Once you know how much your time is worth, you’re better able to make good decisions. You can free up your mental resources for following the things that excite you.
Your Hourly Rate Is More Than Financial
At the end of determining your hourly rate, you’re going to have a dollar amount. You got me there.
But that dollar amount is more than a financial figure.
That dollar amount is your ticket to freedom. It’s a number that will let you stop doing things you hate, and start living a life that excites you.
Knowing your hourly rate frees up your mental capacity to make the decisions that matter to you. It makes the decisions that don’t a lot easier too.
Money Isn’t The Meaning Of Life
Too many people love money. They chase it. And it leaves them empty.
While money plays an important role in life, it isn’t the meaning of life itself. Far from it. Money is a tool that you can use to do the things that bring you satisfaction.
In other words, money isn’t the meaning of life, but it can help you get closer to it.
The first step in determining your hourly rate is going to be deciding what matters to you. I’m not saying put a price tag on those things. Just take some time to think about what they are.
To borrow an exercise from Ramit Sethi, if you could wave a magic wand and have a fulfilled life, what would it look like? It may be big things or small things. That’s up to you.
Personally, a life that excites me includes a few things. It’s a life that allows me the flexibility to travel and experience other cultures while getting to be close to those I love.
Use Your Money To Follow Your Dreams
So what do your dreams look like? You may have big, grandiose ideas. But chances are there are a few small things you’d tweak too “if you had the money.”
What are the annoying tasks that suck your time? What if you could get rid of them, and instead use that time to follow your dreams.
That’s what determining your hourly rate is all about. It’s about setting a baseline number that you can use to make financial decisions.
It’s about outsourcing the tasks that you hate and are costing you your life. It’s about getting your most precious resource back. Your time.
Your Hourly Rate Isn’t Your Salary
So we know why you need to know your hourly rate. It will allow you to simplify your decisions and free up time to pursue your true interests.
But how do you figure out what it is? Is it your salary? Not exactly. Your hourly rate is more than just your salary, or your hourly wage if that’s how you’re paid. Your hourly rate takes into account a lot more complicated factors.
How Much Are You Being Paid
Your pay is definitely the starting point. Some things will make more sense to do if you’re paid $60,000 a year than $30,000 and vice versa. So that’s where we’ll start.
I’m going to make my math as simple as possible from here on out. So let’s assume you’re a full-time, salaried employee making $60,000 and working 2000 hours in a year. I’ll also assume you’re single, have no dependents, and don’t contribute to retirement accounts. Okay, enough with the nerd talk.
The first things you need to take into account are taxes. Sure, you make 60k, but you gotta pay the IRS. Your taxable income will be right around $48000 as of the time of writing, and you’ll owe about $6,000 in taxes to the federal government. Let’s be safe and assume another $4,000 in state taxes.
In other words, your take-home pay is actually $50,000. Divide that by 2000 hours, and you get a wage of $25 an hour. Not bad, but there’s more.
Compensation Goes Beyond Money
There’s a reason employers prefer to talk about your “total compensation,” not your salary. Compensation includes all sorts of incentives that you have to factor in when determining your hourly rate. Some are monetary, and some aren't.
Maybe your employer sponsors your retirement plan or pays into an HSA on your behalf. When you’re considering your total compensation, ask yourself “how would my bills go up if I left this job?”
Your total compensation will also go down in a few key areas too. For example, if you work 2000 hours a year, but commute 30 minutes each way to your job, you should factor that time in. You can’t do much else when you’re stuck in traffic.
Assuming you’re working 50 weeks out of the year, that comes out to 250 hours a year commuting. Added to the working hours, you get 2250 hours a year spent on work, for an hourly rate of $22.22.
If you ever work more than 40 hours a week, take fewer vacation days, or have a different commute, you’ll need to tweak the numbers. Make sure you’re painting an accurate picture of your time and compensation when determining your hourly rate.
Your Hourly Rate Is A Decision Metric
When you determine how much your time is worth, you can make more accurate decisions. You can decide what is worth your time, and what is worth paying to skip.
If something is going to take you several hours, but you could farm it out to someone else for 10 or 15 bucks, it might be worth it to devote your time to something else.
More importantly, you can rethink your impulse purchases. When you see that that new sweater will cost you 4 hours of your life, it makes you stop and think. Is a new sweater worth 4 hours of my life?
Maybe, but chances are you’ll end up passing on a lot of impulses.
Time Is Money
Or more accurately, money is time. Like Vicki Robin and Joe Dominguez outline in “Your Money Or Your Life,” money is a proxy that you use to represent the hours of your life.
You exchange your time to your employer for money, then you use that money to buy goods and services. Figuring out your hourly rate is about cutting out that middle step so you can better reflect how much time your decisions cost.
When you know how much your time is worth, you can start buying back your freedom. You can make decisions that get more of your life back. You can convert your money back to time.
Deciding what to do with your money is emotional. There are underlying motivations, past decisions, and external factors like advertisements and the views of your friends and family. That’s a lot weighing on your brain, especially when you consider that we aren’t very good at processing how money actually works.
Something we do pretty intuitively, though, is understand our time.
We all just sort of “get” that there are 24 hours in a day. Use that intuition to help you make financial decisions by determining your hourly rate.
Stop Wasting Time On Things That Don’t Matter
Knowing your hourly rate is about buying back your freedom.
It allows you to make smarter financial decisions because you realize how much time each of your purchases is costing you. You have to put your actual life on the line, and that’s a lot more real than just your money.
Maybe you’ll see that things that don’t matter to you are eating large portions of your income. You could gladly give them up, stop putting in overtime, and get more of your life -- and your money -- back.
Or maybe the opposite will be true, and you’ll realize there are things you’re doing now that would be worth it to pay someone else to do.
For me, this was grocery shopping. I realized that, for $15 a month, I could save myself weekly trips to the grocery store. I usually spent about an hour commuting and shopping, and now my groceries just show up at my door. And there’s no risk of impulse buys.
All in all, I probably save more than $15 a month just from the impulse buys. But more importantly, it freed up 4 hours of my life every single month that I can use to focus on Hearthstone.
That’s 4 more hours helping people, doing what I love, and focusing on the areas of my business that generate revenue. Can’t beat that.
Conclusion
If you don’t know your hourly rate, it can be tough to make financial decisions. After all, money is such an ephemeral concept. It isn’t grounded in your everyday life in any meaningful way.
Your hourly rate flips that script on its head. It allows you to frame financial decisions as what they are: life decisions. It shows you exactly how valuable your time is and why you shouldn’t waste it on frivolous things.
Everyone’s hourly rate is going to be unique, so it’s important to take the time to determine yours.
Knowing how much your time is worth unlocks the doors to financial freedom. It allows you to make smarter decisions that are in line with the key areas of your life, your Hearthstones.
You can move closer to your goals, rather than just treading water.