We spend time giving up some of our human capital to build our other forms of wealth. Part of how we optimally deploy our human capital is to build more human and social capital. However, we also exchange some of our life force to make money and use that money to buy the resources of others to support us.
Money is simply the common and convenient currency that we use for the exchange. The common denominator is time. Like the exchange between different currencies (such as $USD and $CAD), we have an exchange rate for our time. Our Time-Money Exchange Rate (TiMER). We only get a fixed amount of time to exchange. Then, the bell tolls. So, knowing our TiMER is vital for us to be financial Vulcans and make logical decisions about how we spend our time and money with the time that we are given.
Step 1: Know how much time you spend making money.
This is a tough one for many of us to answer honestly. We can lose ourselves in our work and the lines are blurred when we are on call. Time spent physically at work, catching up on work at home, altering what you would otherwise be doing due to being on call or thinking about work. Unless commuting is something that you find enjoyable, and would do regardless of work, is time spent to earn money. They all count because you and your family are making a sacrifice. If you want an outside view of how much you work, ask your family and closest friends.
To make it simple: what is the average number of hours you work in a week? How many weeks do you work in a year? Use that to figure out how many hours per year you work.
Step 2: Determine your income after basic overhead costs.
Take your revenues from all sources (clinical billings and stipends, teaching honoraria, outside salaries, etc) and subtract your basic costs (employees, professional dues, office expenses, conferences, accounting, legal, billing agents). That is likely readily available from your business tax return.
Also consider costs that you incur that revenue Canada doesn’t let you count as an expense. Like routine driving to and from work. The wear and tear and fuel is about 60 cents per kilometer.
Step 3: Determine your after-tax income.
You can only spend after-tax money to make personal purchases. So, determine the tax on your net income and subtract that. If your money is paid via a professional corporation, that is only tax deferral. You still need to pay that money and personal income tax to be able to use it. To spend the money that you earn now, it is, at best, the same total tax rate as taking it personally. So, don’t use what you pay out of your corporation. Use what you really earn now as if you were going to spend it now.
Step 4: Calculate the after-tax value of your time by inputting your info into the calculator below.
Step 5: Use your TiMER to make more educated spending decisions.
Spending at work vs spending at home.
Spending money to directly earn income may be a legitimate business expense. If that is the case, then your TiMER is based on the pre-tax value of your time. Spending money on a deductible business expense to improve your efficiency or comfort at work is much more TIMER-efficient than personal spending.
For personal spending, it is the after-tax value of your time that matters.
Purchases
When considering a purchase, consider how much you will need to work to pay for it. That could be money that you already have. It could be money that you are considering taking on debt for. If using debt, you are borrowing time and effort from “future-you”. That means “future-you” will need to work that amount plus more to pay the interest. Their TiMER still applies.
If you know that the after-tax value of your time is $100/h, you can then ask yourself whether a $10K one week luxury vacation is worth working 100 hours for. The answer may be yes, it may be no. Or it may be that you’d rather take more vacations that cost less and have more time off work to do that. We all need to re-charge. Perhaps a $10K vacation recharges you more than a $5K one and enables you to happily work more hours to pay for it. The answer will be different for everyone, but knowledge helps us to make better decisions.
Outsourcing vs DIY
Knowing your TiMER can also help you make decisions about outsourcing work versus doing it yourself. You can buy time instead of stuff. How does your TiMER compare to what you would pay for some common professional help?
- Plumber: $100-150/h
- Electrician: $80-150/h
- Car Shop: $80-125/h
- Painter:$25-100/h
- Personal Cook: $30-40/h
If your TiMER is $100/h, then it may be worth paying someone $50 to save you an hour or two of your time. Of course, many tasks are not simply a financial decision. You need to consider the skill required, danger if you mess it up, tools needed, and how much you enjoy the task itself also. Changing my own winter tires (now my kids do it actually) is worth it for me. Conversely, I recently hired someone to cut a big tree down beside my house. I have a chainsaw and know how to use it. However, there was a significant danger factor and skill factor to consider this close to my house.
We are looking for a personal cook.
Your TiMER can change
Improve your TiMER by developing new skills or efficient ways to do things. Investing your time and/or money may be required. Most of us have invested an incredible amount of time and money into our training. Fortunately, that results in our TiMER increasing as we move from medical student to resident and then resident to attending physician. As an attending physician, consider how you can improve your efficiency or learn new skills both at work and at home.
Like other currency exchange rates, the future movements are uncertain. For example, be careful not to spend your money while a student as if you had the TiMER of an attending! Your future TiMER has a degree of uncertainty and the amount of discretionary time you have may be less than you realize. It also takes time in new roles to improve your efficiency. Further, the impact of taxes on the TiMER of future-you increases dramatically as you earn more.
We get diminishing returns for earning more money. The value of your time decreases as you earn more in progressively higher tax brackets. You can see that in the downward slope of the TiMER in the calculator as you move through the calendar year. That makes it increasingly difficult to out-earn a spending problem. We also adapt to our spending which puts us at risk of doing a lip-skid on the hedonic treadmill if we don’t pay attention.
Summary
It is simple to calculate your Time-Money Exchange Rate (TiMER) using the calculator embedded in this post. That still requires you to get an honest estimate of how much you work and earn. Knowing your TiMER is an objective piece of information that you can use to make decisions about spending time or money on goods or services. That can help us to be logical. However, there are still emotional and personal preferences that supplement this. Look for ways to improve your TiMER and earn what you are worth. Working more efficiently can improve your TiMER. However, simply earning more to pay for personal spending decreases your exchange rate due to taxes. That, amongst other factors, makes it difficult to extract ourselves from a dangerous money trap.
I was reviewing the concept of spending money and it reminded me of your article. To decide whether to outsource tasks vs doing it on your own on a purely financial basis (eg mowing the lawn), should we include investment returns when deciding our after tax hourly rate? The reason I’m asking this, is that many people who have accumulated assets over the years increasingly outsource tasks intuitively not because their hourly rate increased (even though that may be true), but because they felt their net worth increased substantially. Also, while we accumulate assets we also lose our human capital. So would it be more accurate to include investment returns in our calculations?
Hey Mark,
Interesting thought. I still think a decision to do it yourself or outsource is a human capital decision since that is what is being spent from. However, scarcity and abundance makes things more or less valuable. So, when I have tonnes of human capital and little financial capital, that would factor in and make me lean towards preserving my financial capital. If I have an abundance of financial capital, then it becomes less valuable to me than my time. My time is fixed and my ability/desire to put in work is probably also less.
In summary, while the objective value of your time is still a factor. The decision to outsource also depends on how valuable money vs your time is to you subjectively (which changes as you have more money). That’s the way I look at it. When I speak about this topic, I call it the “yuck modifier” – how undesirable the task is. There is also a “danger factor”, like working on ladders for me.
Mark