The Dollar Rule

Submitted by George on Tue, 2008-06-10 01:55

Time = Money

The old saying that "time is money" is well-worn but just as true today as it was generations ago. The Dollar Rule is just a minor twist on this proverbial formula. You can trade one for the other: mow the lawn yourself or hire the kid next door.

So when do you do it yourself, and when do you pay someone else? My general approach to figuring out which to spend is simply this: whichever you have more of (time or money), spend that one.

If you have lots more time than money, you probably should spend time and not money. Conversely, if you have lots of money then you can buy back your time by spending money.

So how much time equals how much money?

In 2002, an Economics professor at Warwick University (in England) devised a formula to address exactly that question. It factors in your hourly wage, your tax rate and your cost of living. Using this formula, the average working-class Brit's hour was estimated to be worth from $7.10 (women) to $8.99 (men). Want to see what your time is worth? Try our no-brainer Time-Worth Calculator.

These time-worth calculations can be quite useful, especially when you want to see if it's worth the money to buy back your time. For example, if your hour is worth $10 and it takes 4 hours a month to keep the lawn mowed, you might be justified in paying up to $40/month for someone else to mow it for you.

Money = Time

While it's interesting to calculate your time-worth value, the Dollar Rule actually deals with the formula going in the other direction: Money is Time.

For no especially good mathematical or financial reason other than "it seems about right", the Dollar Rule uses the simple ratio of one dollar per hour. This make calculations easy to do in your head so that you can use it at any time. (I suppose if your finances are significantly better than the average person, then perhaps your ratio could be 1 hour per 5 dollars, or 1 hour per 10 dollars. But for simplicity we stick with one dollar per hour.)

This 1:1 ratio does not imply that your time is only worth one dollar per hour. The Time=Money equation (and Time-Worth Calculator) already tells us your time is worth $5/hr, $25/hr or whatever.

Just consider the dollar-per-hour value as a quick measure of the return on investment (ROI) you are getting for your purchase. Again, this is just like the MPG of your car. For every dollar you put into an item, how much are you getting back out of it? Is it an item that just sits in your closet or something you use all the time? If you do use it, how long do you have to use it to make it a worthwhile purchase?

Basic Example: The Dollar Rule vs. Coffee Mug

Let's see how the Dollar Rule works for a simple purchase: you want to buy a coffee mug that costs $4.00. Applying the Dollar Rule, you'd have to use the coffee mug at least 4 hours to make it a break-even buy. Use it less than 4 hours, and the mug becomes less worthwhile of your money. Use it more than 4 hours, and you'll be ahead.

Seems kind of obvious? If you frequently drink coffee or tea then probably the purchase makes easy sense. 4 hours is easily reach in a week perhaps. But for someone who only uses mugs very occasionally, it starts to make less sense. Or perhaps you tend to buy mugs everytime you go on a trip or anytime you see a cool new obnoxious saying on a mug. So now you happen to have 30 other mugs. Are you going to reach 4 hours of use with the new mug as quickly now, if you are rotating through your vast mug collection?

That's an admittedly simply example. But when the price tags start to have a few extra zeros on the end, using the same Dollar Rule yields significantly different implications when you're looking at a new computer or upgrading to a dSLR camera. We'll cover more specific examples later on.

For now, just realize that the Dollar Rule doesn't tell you what to buy or not to buy. The Dollar Rule doesn't care if you're buying a new plasma TV or a hat or a car. It's just a tool to give you a relative measure of what you're getting out of your investment in a particular item or service. Once you start to apply it to all your purchases to see your real return on spending (ROS), you will subtly change your buying decisions, even if you're not actively trying to budget yourself.

» Next up: Some background on the Dollar Rule

 Tags:

• money
• time

 

• George's blog
• 1035 reads

»