Time value of money, money value of time

"Well a rich man counts his time/like a poor man counts his money"

The money value of time comes up a lot in personal finance, such as in the thought "My time is worth $__/hour, so it's not worth it for me to spend hours mowing the lawn/cleaning the house/etc. I'll hire someone to do that." This is a potentially useful heuristic, but I think the obvious formulation of it is way wrong. Leaving aside the question of whether the wage used is adjusted for taxes, the fact is that most people are not in a position to get payed anything at all for the time they would be using to mow the lawn. If you have a salaried job and no side gigs, the marginal value of an hour of your time is $0.

So decisions about whether to spend time or money on a problem or need aren't really about which solution leaves you richer. Spending time always wins. The question is how much it's worth to you to not have to spend that time. One way to answer that question is to put a value on the time you would have to spend based on what you would actually do with it--if you'd be watching TV, probably the number will not be high, but if the cost is time spent with your kids or doing a hobby that you love, it might be quite high. Another way to approach the question is to convert the money back into time, i.e. figure the time value of your money.

I don't recall seeing much discussion of the time value of money in personal finance writing, but it seems to me like a very useful quantity when trying to make good financial decisions. Here's my formula:

(annual increase in net worth) / (workdays/year)

It's very simple, and the quantity it produces is the money value of a day of your life. For example, for someone who saves $12,000 per year (I include debt principal paid as part of savings) and works a regular full-time job with 10 holidays and 10 vacation days, the formula says:

$12,000 / 240 = $50 per day

So a $50 concert ticket costs that person a day of their life.

Note that this is a heuristic for evaluating marginal and discretionary spending. Housing, insurance, and any established spending habits are already built into the savings number. Those are obviously important, but they're not really areas where time and money valuation heuristics come into play. They're subject to baseline personal finance rule #1: Spend no more than you need to on the things you've chosen to spend money on*. As for how to arrive at a number for total annual savings, assuming you're not a Quicken or Mint or other tracking tool user, probably subtracting end-of-year statements makes sense. Or else get decent data for a few months and extrapolate. (I use Quicken, so I can tell you to the dollar.)

Note also that if your net worth is not increasing then you won't get a useful number from this formula. In that case you're either in a state of emergency or you don't expect to ever do better than scrape by**. The calculations for living in financial despair are quite different.

Armed with this quantity, you can go back and evaluate the amounts you want to spend on saving your leisure time. E.g. would you be spending 3 days' worth of money just to save one evening's worth of yard work?

*Baseline personal finance rule #2: Choose wisely what you spend money on, especially when it's recurring.

**Ok, yes, there's also the possibility that you're smoothing your consumption over time because you expect to make much more later. Which makes plenty of sense in some circumstances.

Pithy aphorism time

If your business model doesn't work without externalizing massive harms, it's a bad business model. If a new regulation or a cultural shift is going to make it stop working, that's a feature, not a bug. (Thinking at the moment of business models built on exploitative labor practices like low minimum wage and unpaid internships. Obviously the fossil fuel industry is another among the many to which this idea could apply. And of course the worst part is that in a lot of cases the business model would actually still work fine, just with slightly lower margins.)

UPDATE: Turns out this is basically a rephrasing of something FDR said:
"It seems to me to be equally plain that no business which depends for existence on paying less than living wages to its workers has any right to continue in this country."

Using up words, growing days: What happens when you use something

The other day I was reading an article by a Sweet Valley High ghost writer, which included this thought:

"What if you’re only born with so many words, and you use up the ones you’ve been allotted on writing somebody else’s stories? Then what?"

"That's nuts," I thought, "of course words grow like a muscle." To be fair, the author was quoting that concern expressed by someone else, and she clearly didn't buy it, though she did have anxiety about the related concern that she might be developing her "repetitive simple prose for teens" muscles to the detriment of her ability to write in other styles that she would find more fulfilling.
But anyway, that got me thinking about the different ways resources are affected by being used. Here's my little taxonomy:

1. Depletion: For some things, there's only as much as there is. Mines and oil wells come to mind. Also teeth.
2. Limited but renewing supply: a peach tree will produce in a summer, at most, as many peaches as it had fertilized flowers in the spring, but there's no sense trying to limit your harvest to leave some until next year, nor will picking the ones that are there make more appear. Obviously the nature and the flow of things like this can vary a lot. Vacation days tend to come in at a slow and steady rate, but can be spent fast or hoarded all year. Sunlight comes in a deluge when it comes, but it’s really hard to hold onto it.
3. Growth: the more you spend of your physical and mental resources, the more you tend to have at your disposal, once you’ve recovered from the immediate exhaustion. An athlete gets stronger by spending strength.

It’s possible I’m wrong about a writer’s capacity growing from use. Arundhati Roy and Harper Lee each apparently had one novel to give. In fact, the more I think about it, the more it seems like certain types of creative work often or even predominantly follow a depletion pattern. There are lots of writers, musicians, and other creative artists who seem to have a certain amount of brilliant and important stuff to get out, and then they either stop or start producing work that doesn't live up to what came before.

But then there are others who either have an abundant supply of different things to say or who have one big thing but are continually able to come at it from different angles. So actually it seems like creative work can fall into any of my three categories. Probably some types of work tend more toward one or another (writing possibly to #1, pottery more toward #3), but with plenty of individual variation.

Another nuance or qualification applies to #2: sunlight is limited from the perspective of absolute availability, but in a way it’s unlimited because it’s impossible to use all that’s given. Time seems to work that way, too--it’s terribly limited and constantly being depleted, but on the other hand there’s always room to use one’s time better, and to some extent it will expand when you do*.

So what’s the point of all this? Well, aside from the joy of making distinctions and listing things, I think it can be useful for understanding the costs and benefits of one’s actions. Obviously mistaking a finite resource for a renewing one can lead to bad choices, but I think the easier mistake to fall into is the one I reacted to in the first place--looking at the cost of some choice and seeing only loss when in fact it’s the kind of exertion from which you’ll come back stronger.

*I’m sure this has been pointed out before and was the intended irony of the character, but I’ll just say it rather than finding a source to cite: Dunbar in Catch-22 had it completely backward. Being bored only elongates the moment itself, but in any retrospective view of time, even on the scale of days or weeks, time seems longer in proportion to what you did with it, especially new and interesting things. The first day in an unfamiliar country can feel longer than a month of one’s usual routine.