How Much is Your Time Worth? Learn How to Calculate it (& Increase Your Value!)
You have probably heard the expression “Time is Money,” right? For entrepreneurs, this old proverb could not be more true. Once you start your business, how you spend your time will determine the success of the company. Everyone’s time is valuable, but to varying degrees. As the business owner, your time is worth more than anyone else in the company. But do you know how much your time is really worth?
The first step toward building a highly successful and efficient business is to identify how to value your time. The second step is to figure out how you can build systems that will allow you to focus on high value tasks, rather than spending all your time on trivial, low value tasks. Entrepreneurs who learn to who focus their time on the tasks that bring in the most value will build the greatest empires. Today I will show you how to measure and value time, how to save more time, and what non-monetary value your time has. Discussing these topics will empower you to say “no” to low value opportunities, and focus on automating to bring the highest value from your time as possible.
Why You Should Care
Recognizing how much your time is worth is critical for any sort of decision making. It doesn’t matter if those decisions are personal or for business, you are showing how you value your time everyday by the way you spend it. If you are working at a 40 hour per week job, you are deciding to value your time at your set wages. In other words, your boss is deciding how much your time is worth, and by choosing to work there you are agreeing with him. As a business owner, however, you must decide the value of your time for yourself, no one will do it for you.
Say for instance you value your time at $50 per hour. Now you can make decisions on how to spend your time, because you will say “no” to tasks that offer $40 per hour. Similarly if you were paying a lawyer $100 per hour, would you allow him to spend that time sweeping your floors? No, of course not, because that task could be done for much less than $100 per hour. Apply the same principal to yourself.
Understanding the value of your time helps in your decision making process. Not only will it aid in making decisions faster and more confidently, it will allow you to focus your time on doing what is most valuable for the company. Knowing your time value will also help you in pricing your services, negotiating salary, and budget more effectively.
An example of someone who does not understand the value of their time might be someone who spends their time standing in line for a free sample at the grocery store. Just the other day I saw a huge line at my local Chick-fil-a because they were handing out free sandwiches. One sandwich may be worth $3.99, so by standing in line for an hour, those people are valuing their time at $3.99 per hour. Is that worth it?
Another example is one I have used in one of my past businesses. I know what my time is worth today, but I also know what I want my time to be worth in the future. That allowed me to be more selective with the jobs that I took on. I moved away from the “I’ll do anything and everything” to defining a target client and only taking on work for that type of client. This is because the type of client I was targeting would place a higher value on my time.
How the Value of Time Applies to Business Ownership
Knowing the value of your time can help you in your business as well. For example, if your time is worth $50 per hour and it’s going to take you four hours to fix broken pipes at your business property, you may be persuaded to pay a plumber $150 to fix the problem. Or you pay a plumber $45 per hour. Both outcomes result in you gaining monetarily from your decision to outsource the work.
On the other hand, if you don’t know the value of your time, you’ll become the classic do-it-yourself business owner. You will not focus your time on the highest valued activities. You will focus squarely on your savings in lump-sum dollar terms. This is a bad way to run a business.
“But Sam, hiring everything out will get expensive. Do you want me to be poor?” No, conversely, I think that if you are doing it all yourself, you will be poor. The key is that you actually spend your time wisely, and not just hire out so you can be lazy. If you can make $50 per hour and that plumber costs $45 per hour, you had better spend that time actually making $50 per hour. You cannot sit on your couch watching the plumber work and think you are saving money. Think about this:
How many wealthy businesses do you see the CEO out doing the landscaping? How many poor businesses do you see the owner doing all the work themselves? This is my point. Successful business owners understand that they can make more by spending their time doing the valuable work. Richard Branson says he doesn’t even do his own laundry because he spends that that time learning and growing his business.
How to Determine and Measure Value
Everyone probably knows, at least on a basic level, how much they value an hour. Even salaried workers can calculate the value of a work hour simply by taking their gross income and dividing it by 2,080 hours. This gives the gross value of each working hour assuming a 40 hour work week.
Now business owners should take that a step further, because we do not clock in and out of our job. Instead, we divide our gross income by our average daily “awake” hours, including weekends. This will give you how much every hour of the week is worth, but keep in mind non-monetary value (which we will discuss shortly) comes into play. Always keep this value in mind for future reference.
Taking it further still, everyone has a different tax position, and you can take your unique tax position into consideration. For instance, 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 pretty widely depending on the variables. These can be used separately in different ways. For example, if you are growing a business, you may be focused on the “top line,” which means you should emphasize growing your gross values through increased sales. If you are just starting off, 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 in gross terms, for example a job will be quoted with the top line. This makes it quick and simple to value my time per opportunity.
At home, I use my post-tax value purely as a motivation method. If I know I’m burning a certain $20 per hour, I’m going to be motivated to make something of that hour, even if it’s 10:00 a.m. on Sunday.
You can see how this already begins to change your mindset. Now let’s think about it this way: instead of saying “I need to make more than $100K per year,” say “I need to value my hour more than $10.96 per hour.” I do this because it allows me to focus on a smaller, seemingly easier number to manage. Let this push you to become more efficient, and look for ways to increase your hourly worth.
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.
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.