Last week, I introduced my thought experiment about the value of time, called the Marginal Time Value Philosophy. In short, my thesis is that not all time is worth the same, and that we should live our lives accordingly. I suggest checking out Part I before we dive into Part II today.
As I mentioned last week, I consider 72 hours of my week to be negotiable, and $2500 a month as my minimum required salary, or $600 per week (again, that net pay, not gross pay).
The example: Hour #1
Next, we put the Marginal Time Value Philosophy into action. Let’s start at the beginner: Hour #1.
Using our hypothetical , how much do I need to earn in that first hour? In my example, it needs to be worth at least $600/72 hours, or $8.33. That’s $600 to meet my weekly needs, and 72 hours as my maximum number of negotiable hours.
So as long as I earn at least $8.33 in my first hour, then I’ll be on track to meet my most basic needs in my most extreme work scenario. Thankfully, however, I make more than $8.33 an hour. For the sake of simple math, let’s say my employer pay me $20/hour (after taxes, insurance, 401(k), etc). $20/hour is my actual take-home pay rate.
So, after that first hour when I’ve earned $20, there are two follow-up questions:
1) How much did I earn above my needs in that first hour?
2) What is my adjusted minimum salary for the rest of the week?
The first question has a simple answer: I earned $20, I needed $8.33, so I made $11.67 above my requirements. So, $11.67/hour is my marginal value for this hour. That’s how much I earned above my needs this hour.
The second answer is also straightforward: I originally needed $600 for the entire week, and I earned $20 in hour #1. My remaining need, therefore, is $580 for the rest of the week.
Hour #2 through Hour #31
So let’s move ahead to hour #2. I need $580 more this week, and I still have 71 remaining negotiable hours. Therefore, as long as I make more than $580/71 = $8.17 this hour, my budget and life will be ok.
I make $20 this hour (again). This time, my marginal value is $11.83, and now I need to earn $560 for the rest of the week.
This pattern plays out over and over again. The marginal value of my time slowly creeps higher. I need the money less and less, but I’m consuming more of my available time. Therefore, the time is worth more to me. This metric–the marginal time value–behaves exactly in the way I feel about my time.
But let’s stop this pattern for a second to take a look at Hour 30. After 30 hours of earning $20 per hour, I’ve now met my needs for the week (30 hours*$20/hour = $600. Nice!!). For the 31st hour, I need to earn…nothing! Yet, I continue to earn $20 during this hour, so my marginal time value is the full $20. My marginal time value has increased from $11.67 in hour 1 to $20 in hour 31.
The Marginal Time Value takes off
For hour 32, my remaining weekly earning requirement is (-$20). I just need to make sure I don’t lose $20. Yes, it’s a ridiculous thing to think about; how can you lose money by working!? But since we want to apply a marginal value to our time, we should keep the model consistent.
Looking forward, I need to ensure that I earn more than (-20) in the next 41 remaining negotiable hours, or -$0.49 per hour. My marginal earning for Hour 32, therefore, is the difference between $20 and -$0.49, or $20.49.
If I keep going until hour 40…I do a little math, and my marginal earnings for that hour are $25.45. And that’s when my personal workweek typically ends. I usually don’t work over that, and certainly never approach my non-negotiable zone of 72 hours.
The beauty, if I may say so, of the Marginal Time Value Philosophy is that it accounts for the time when you are earning money beyond your needs. Spending additional time at work when I could be pursuing my other interests in life becomes less and less enticing, and therefore that time more and more valuable to me. Each hour approaching my limit of negotiable hours—something I’d prefer not to exceed—eats up bigger and bigger percentages of my remaining free time, and therefore is worth more and more to me. My first hour of work is worth $11.67, but my 40th hour is worth $25.45. My 60th hour of work is worth $70/hour!
Applying the Marginal Time Value to Real Life
Since my marginal time value of Hour 40 is about $25, should I assume that an hour of my time on the weekend worth ~$25? Yes and no.
My first hour of work beyond 40 is worth $25.45. Work, in this model, is time that I don’t really own. If I’m with my friends, or exercising, or plugging away at a fun DIY project…that’s not work. That’s pleasure. I don’t ever think that I’m burning $25.45 an hour by hanging out with my girlfriend (pro tip: never tell your girlfriend that you’re applying a marginal value rate to her).
But whenever someone asks me to work for them—coming into the office on the weekend, giving a squash lesson, helping a random Facebook friend with their physics homework—I think about that $25/hour rate.
If I mow the neighbor’s lawn for $20/hour, some people would say, “That’s fine; you said you take home $20/hour from your normal job.” But the point of the Marginal Time Value Philosophy is that the 41st hour of my workweek is worth more to me! It’s taking away a bigger percentage of my free time! It’s worth ~$25/hour. So, if I say yes to the neighbor, then I better be able to find another $5 of value in there. Where does that $5 come from?
- Maybe I love mowing lawns (i.e. it’s not work to me). I’d take $20/hour to have fun.
- Or maybe I listen to an eBook (pleasure) or turn it into exercise (health) with an old-school mower. I’d accept money to listen to an eBook, or to work out.
- But if I dislike mowing and I’m purely in it for the finances, then spending my 41st hour of work to mow their lawn for $20 is a bad deal for me.
Maintain balance: what’s work, what’s fun?
Some people maintain that applying a dollar value to your time is a sure-fire way to spin down the rabbit hole of bad thoughts. You’ll turn into a Scrooge, balking at every wasted minute. You’ll lose sleep thinking about the money you lose while sleeping. It’s a vicious cycle!
Well, one goal of this blog is to spend less time doing things you don’t want to do, and more time doing things you do want to do. I never feel bad doing something that I enjoy, or that keeps me healthy or keeps me sane. Don’t fret about the time you spend with family, with friends, pursuing your passions. My suggestion would be to only apply this idea to hours that you feel you do not own, and never to your leisure hours or your non-negotiable hours.
But the next time your neighbor asks you for “just an hour” to mow her lawn, you might want to think about what that hour is worth to you. Thanks for reading the Best Interest.