Time is money: How frugality buys freedom — tomorrow AND today

Time is money and money is time.“Time is money,” my father used to tell me when I was a boy. He didn't like how I dawdled with my chores. I didn't understand what he meant back then. To me, time and money were two very different things. As a kid, I had lots of time but very little money.

Now, as a nearly fifty-year-old man who has written about personal finance for the past twelve years, I get it. Dad was right: Time is money — and money is time.

This notion is the central lesson of Your Money or Your Life, the personal-finance classic by Joe Dominguez and Vicki Robin. “Money is something we choose to trade our life energy for,” they write. “You are the one who determines what money is worth to you. It is your life energy. You ‘pay' for money with your time. You choose how to spend it.”

The authors say that because you spend time in order to earn money, you're also spending time whenever you make a purchase. This has some powerful implications.

  • When you treat time as money (and money as time), you can better evaluate how to allocate your dollars and your hours.
  • When you know how much your time is worth, you can decide when it makes sense to “outsource” specific jobs.
  • When you spend less, you can work less. In a very real way, frugality buys time. But on a deeper level, frugality buys freedom — financial freedom, freedom from worry, freedom to spend your time however you choose.

Because of the time factor, Dominguez and Robin argue that you don't earn as much as you think you do. You may be paid $33 an hour, but your real hourly wage is less than that. Possibly much less.

How to Compute Your True Hourly Wage

Let's say we have a friend named Joe and that he's a plumber. Joe currently makes the national average for his profession, about $55,000 each year. His nominal wage is approximately $27.50 per hour.

Based on these figures, if Joe the Plumber decides to buy a $495 iPad, he'd need to exchange eighteen hours of his time for it. (Eighteen hours worked x $25 per hour = $495 total wages.)

Ah, but it's not that simple. Joe's real hourly wage isn't $27.50 — it's something lower.

Think about your job. Think of all the things you do and the money you spend that you wouldn't if you didn't work. How long does it take to drive to the office? How much does gas cost? Are you required to own a suit or a uniform? Do you have to take vacations to cope with the stress of your career?

Your Money or Your Life lists eight such possible job expenses, including a few which might be applicable to Joe:

  • Commuting — Joe's office is 20 miles from home. Every day, he spends an hour total commuting to and from work in his 2010 Toyota Camry, which costs about 49 cents per mile to operate. His weekly commute costs him five hours and $98 (49 cents times 200 miles).
  • Clothing — It doesn't take Joe extra time to get dressed in the morning, but it does cost him a little extra money. Several times each year, he has to buy new work clothes because the old ones wear out. Maybe he spends $500 annually on work clothes.
  • Food — Joe might take a sack lunch if he were on his own, but he works with a partner who prefers fast food. Joe likes McDonald's and Burger King too, so he's happy to go along for the ride. Each day, Joe spends about $5 and one hour for lunch.

Each week, Joe's job costs him about ten extra hours for his travel time and lunch breaks. That's about 500 hours each year. He's also shelling out $120 every week on miscellaneous job-related expenses. That's approximately $6000 per year.

Now that he knows how much time and money Joe spends on the job, he can compute his true hourly wage. The equation is simple.

  1. First, Joe subtracts his work-related expenses from his annual salary to find his actual earnings. Using the figures above, Joe is actually earning $49,000 per year ($55,000 base minus $6000 for commuting, clothing, and food).
  2. Next, he computes the total time he spends on his job (including business trips and Christmas parties, etc.). Joe leaves the house at 6:30 in the morning, and doesn't return until 4:30 in the afternoon, which means he's devoting 50 hours per week to work, or about 2500 hours per year.
  3. Finally, Joe divides his actual earnings by the total number of hours he spends each year on work-related tasks.

It takes Joe 2500 hours per year to earn $49,000. His true hourly wage is $19.60. Not bad, but still much lower than the $27.50 per hour he thinks he's earning.

A new $495 iPad doesn't cost Joe eighteen hours of work; it costs him 25 hours of work. To earn money for anything he wants to purchase, Joe has to spend 40% more time on the job than he thinks he does. If you were to include taxes in the calculations, things would cost even more!

It gets worse!
Joe's $27.50 hourly wage is a pre-tax number but his spending is in after-tax money. He probably makes close to $19 per hour after taxes, which means his actual true hourly wage is something like $12.63. That's less than half what he thinks it is. That new iPad will cost him 39 hours of work — almost an entire week. I hope it's worth it!

While most people trade time on the job in order to gain money, this concept can also be applied in reverse. It's also possible to trade money to buy time.

For instance, I pay an accountant to do my taxes. Not only is he better at this than I am, but it takes him two hours, whereas it might take me twenty. In this case, I'm happy to trade my money to free up more time to write.

Here's another example: When Get Rich Slowly was growing like gangbusters, my hourly wage was astronomical. At the peak, my time was truly worth hundreds of dollars per hour. Back then, I had more money than time, so it made sense to outsource whatever I could. I hired a housekeeper. I paid somebody to do yardwork. I had an assistant who answered my email. Meanwhile, I channeled my life energy into making more money.

Today, however, my hourly wage is effectively zero. Yes, my investments throw off some income and I earn a few hundred dollars per month from my work, but in reality I don't have an income. (Because I'm financially independent, I don't need an income. Plus, I suspect it won't take long for GRS to begin producing a modest amount of revenue.) Today, I have more time than money. As a result, it makes sense to do things myself whenever possible. I don't have a housekeeper. I do whatever car maintenance I can. I answer my own email. And so on.

How Frugality Buys Freedom

All of this is interesting, but we still haven't talked about the most powerful product of realizing that time is money and money is time: When you spend less, you can work less and live more. In a very real way, frugality buys time — and freedom.

You can see this idea at work on two levels.

When You Spend Less, You Buy Freedom Tomorrow

First, because of taxes and compounding one dollar saved is worth more than one dollar spent.

As I mentioned earlier, you buy things using after-tax dollars. If you bought a new $23,000 Mini Cooper, for example, you'd use money left over after paying the government. But in order to get that $23,000, the average American would have to earn $30,000. The other $7000 — in the form of 5-1/2 weeks of work — goes to taxes.

But it gets worse. Every time you spend one dollar you could have invested, you don't just lose that dollar but any future return you might have earned on it. Assuming typical stock-market growth, one dollar would have a value of $1.93 ten years from now — and $7.20 in thirty years.

When you combine the effects of taxes and compounding, the results are remarkable. On average, each dollar an American spends represents $2.57 of value in ten years or $9.57 in thirty years. (If you live outside the U.S., the consequences of spending that dollar are probably even greater.)

The bottom line? The opportunity cost of spending one dollar today is ten dollars you might have had in retirement. By carefully guarding your dimes, you turn them into future dollars.

There's a second way in which frugality buys freedom time.

When You Spend Less, You Buy Freedom Today

As you know, I believe profit margin (or saving rate) — the percentage of your income that goes to saving and investing — is the most important number in personal finance. Profit doesn't just remove the wall of worry from your life, but it also buys time — both now and in the future.

When you spend less today, you need to earn less today to fund your lifestyle. It takes less time to earn enough to support $20,000 in annual spending than it does to support $40,000 in annual spending. Obvious, right? But many people fail to see that their lavish lifestyles are the reason they have to work so much.

Spending less also means you need to save less for the future. It takes just $200,000 to fund ten years of a $20,000 lifestyle, whereas it takes $400,000 to fund ten years of a $40,000 lifestyle.

When you learn to live on less, when you keep your profit margin high, you gain the freedom to work less. By maintaining an ambitious saving rate of 50 or even 70 percent in your twenties and thirties, you can retire when you're 40 years old instead of 65. This gives you forty years of freedom to do what you want with life rather than fifteen.

This table demonstrates the power of profit margin:

[The Power of Profit Margin]

Look at those numbers. Let them sink in. Think about the implications.

  • With a profit margin of 20%, it takes four years of work to fund one year of operations.
  • With a 50% margin, you save enough every year to fund another entire year of operations.
  • And at 75%, each year of work funds three additional years of operation.

When you choose to spend less (or to not spend at all), you're not just boosting your bottom line. You're also gaining the time and freedom that would have been required to earn that money. Thrift isn't deprivation. It's wealth.

Frugality is NOT Sacrifice

Frugality is not sacrifice. When you save, that money's still spent. It's just not spent on a Mercedes or a big house. It's spent buying your future freedom. And your present freedom. The opportunity cost of starting late, a foolish purchase, or a bad investment isn’t lost income or lost compounding. It’s lost time – lost experience and lost life.

Ultimately, work-life balance is about managing the way you use both time and money.

In some cases your time is more valuable than money, but often its your money that's worth more. If a new iPad is worth twenty or forty hours of your life, buy it. Otherwise, do yourself a favor: Delay the purchase. Hold on to that money so you can retire sooner instead.

“Between depriving a man of one hour from his life and depriving him of his life there exists only a difference of degree. You have done violence to him, consumed his energy.” — Frank Herbert, Dune Messiah

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Joe
Joe
2 years ago

I love this – Frugality is not sacrifice. You’re giving your future self more freedom when you’re being frugal. That’s a great way to look at it. I’ve been frugal all my life and it builds up. You get used to the frugal lifestyle. Now, life is great and I have a lot of freedom. Being frugal does not feel like a sacrifice to me. Good post.

Wesley
Wesley
2 years ago

Great article…AND a Dune reference!! Very nice indeed =) I haven’t thought as much about time and money in this context lately. I need to get back on it. I’m nearing 40, and I’ve been working as a software developer for close to 20 years. I’m ready for something new, but the money I’m making now is so much better than it was, it makes it difficult to walk away. The burnout is real some days. Time for me to hit the old budget spreadsheet once again, and figure out what it’ll take to eventually phase the tedious aspects of… Read more »

freebird
freebird
2 years ago

I like this line– “The opportunity cost of spending one dollar today is ten dollars you might have had in retirement.” Well it really depends on your time horizon, if you’re young this may be true, but if you’re a couple of years before retirement the multiplier is much smaller. So go ahead and loosen the purse strings when you hit middle age.

But for the recent grads– think about what your student loan balance “really” costs!

S.G.
S.G.
2 years ago
Reply to  freebird

It’s not as small as you might think because the last dollar you save is the last dollar you spend. Therefore even if you’re sixty you could easily have 20 years of growth on that last dollar you save.

Cindi
Cindi
2 years ago

As a frugal finance manager and financially free for over 17 years, you can sharpen up your calculations. Hubby makes $27.50 an hour and in our tax bracket, he loses 15% of that to income taxes, thus $27.50 minus $4.13 is a net $23.37. Coincidentally he just bought a new iPad, but the one without the added WiFi (totally useless since there is free WiFi EVERYWHERE) or he can use his iPhone as a internet connector. These brand new models cost $329. He sold his 5 year old iPad, 2nd generation to Gazelle for $50 bucks, thus bringing down the… Read more »

Alix
Alix
2 years ago

For some people, at some point, all the frugality in the world won’t buy them financial freedom because there’s not enough time. Other people may save millions for a future they never live to see.

Amy
Amy
2 years ago
Reply to  Alix

I think you missed the point. Of course some ppl die before they can retire or cut dish work ?! In fact, I have come very close to dying in the last 3yrs, I was on my death bed 3 dehydrate times it was scary. ? what it taught me is, I need to enjoy life, and while delaying some gratification is good, some things, if you can afford it, do it! ? However, not being frugal is very silly, and I think he made it very clear that you can enjoy life and be frugal I can attest to… Read more »

Amy
Amy
2 years ago
Reply to  Alix

PS: I realise I should have said I wknd only in my early 30’s. I never regret being wise with the money I’ve had, but I sure regret tge stupid stuff I did or careless things I did with the $$$.

JoeHx
JoeHx
2 years ago

> First, because of taxes and compounding one dollar saved is worth more than one dollar spent.

This is so true – savings may have a floor whereas earnings have no ceiling, every dollar saved affects your bottom line more than every dollar earned.

Jared | MrFiGuy
Jared | MrFiGuy
2 years ago

Wow. I just wanted to tell you that I am very impressed with your comment. I agree, that if it’s truly something that you want that will improve your life- go ahead and buy it at a good deal! It takes good judgement to determine what’s ‘worth it’ or not and each person has to make that decision for themselves.

Steveark
Steveark
2 years ago

I loved the post, because as a reader older than most, also FI, I am beginning to feel the speed at which my remaining time is slipping away. Money means very little now because I have far more money than I’ll ever spend and still live simply without depriving myself or my wife of any of our dreams and favorite pastimes. Plus my entertainment side gigs are cranking out six figures I obviously don’t need. Our kids are grown and self sufficient, our parents are gone. In my case my farm grown wife does all the manual and fixit tasks… Read more »

Leona Werezak
Leona Werezak
2 years ago
Reply to  Steveark

I agree Steveark. I’ve been thinking I’d like to right a post about why it’s so important to consider “retiring” early (meaning becoming financially independent so one doesn’t have to work full-time). And the primary reason is time. As long as one’s alive, they can usually do something to earn more money. But NO ONE can buy or earn more time here on earth (aside from getting people to do tasks for us that free up our time as J.D. points out). And the things we want to do in our 20’s, 30’s, and 40’s change as our bodies and… Read more »

lmoot
lmoot
2 years ago

For me frugality goes even further. It buys me peace (less items to maintain, and no feeling of competition). And it buys me opportunity (and not just in the future). I can afford things that live up to their quality and bring a reusable value to my life, which in turn often saves me money. I think frugality doesn’t just impact my future; in fact my hope is that I can apply it in a way that lets me make positive changes in my present or near future; such as reducing work load/hours, being able to spend more time with… Read more »

Accidental FIRE
Accidental FIRE
2 years ago

I like the way you chopped an hourly wage down by taking off the extra time needed for work, in addition to the taxes. It really can be quite sobering to see your actual hourly wage, especially when you have a much larger number in your head that might appear on your pay stub.

Lady Dividend
Lady Dividend
2 years ago

When I calculated my actual hourly wage I was around $16 or $17 dollars an hour which is only a several bucks over minimum wage. I find comparing my hourly wage is most effective when determining whether to attend an event. For example, if I can get a movie for $12.50 and it’s a hour and a half that is a decent use of my time. My sister wants to go to an excursion for a trip we are taking but it’s $150 for four hours. I’m trying find a less expensive way we can do that while still enjoying… Read more »

Jennifer
Jennifer
2 years ago

This is timely for us. We are right at the border of financially-independence, but we have 2 teenagers and health concerns that could easily help us undo that if we aren’t vigilant.

I’ve noticed that we’ve had a bit of “lifestyle creep” in the form of monthly subscriptions, hobbies, and other spending habits we should at least investigate, if not rein in. Every dollar saved . . .

Betty Dotson
Betty Dotson
2 years ago

This has been a very eye-opening post for me.

Sad to say we just started working toward being debt-free last September. (Dave Ramsey 9 week class) We’re both 63 years old.

I so wish I had this information when I was in my youth.

I will share this with my daughter as well as my grandsons.

Thank you, thank you, thank you!

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