Time Value Of Money

Time value of money is taught in every finance class. Rich people understand this very well because their money earns money for them over time. However, despite the title of the post, I want to actually address another topic “money value of time.” Certainly, you’ve heard statements such as “it’s not worth your time to …” Well, how valuable is your time if we use dollars as the unit of measure of value? Should you spend endless hours to save 10% on your new purchase? Should you clean your yard or hire someone to do it for you? Setting aside your personal preferences (for example, you do not enjoy yard work), and considering only the monetary impact, what is the right answer? The simple answer is your time is as valuable as you make it.

I just recently understood or actually felt this concept for real although I had read about it in a number of books many years ago. For reasons unknown to me, in the past few months my goals have become so exciting and my responsibilities have become so overwhelming that together they have forced me to think about priorities even harder. Some business ideas seem within reach but much time must be spent to actually realize the concepts and earn money for that hard work. The issue is that if I spend time on the ideas (which may or may not earn money in some distant future) and hire someone else to perform my chores, the short-term costs of the chores are felt right away and are hard to balance against the long-term questionable possibilities of successful ventures.

Let me break it down further. Time spent watching TV is worth $0 if you would have done nothing with your time anyway. Time spent watching TV costs you dearly if you could have instead worked on a business idea or helped someone else with their business (this is what you do in your job if you work for someone else). Time spent cleaning the house (again not considering the qualitative benefits of hygiene and order) is worth $50 if someone else is available to do the chore for $50. Time spent cleaning the house is worth $-50 if you could earn $100 in that same amount of time if you weren’t busy cleaning the house. Here comes the harder example. What is the dollar value of one hour spent on a business venture? To assess the money value of your time we actually need the the help of time value of money. Assume your venture is worth $1,000,000 in 10 years and assume it takes you 2,000 hours (equivalent to one year full-time work) before you get your first paycheck (this is that startup period — your investment period). Assuming a 6% annual interest rate, if my calculation is correct, your million dollar business in 10 years is actually worth $549,632.73 today. If someone gave you half a million today for your next year of work, wouldn’t you take it? In this case, each hour over the next year spent working on the business would be worth $274.82.

Obviously, life is not this simple but I hope you will think about the value of your time and the cost of your activities and will assess the true impact that your decisions and choices have on your life and the lives of others around you.

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