Don’t fear the title, all will become clear...
Sometimes, we are faced with decisions where we can either save money, or save time. For people who are budget conscious, it is tempting to always choose the cheapest option no matter what. Unfortunately, that frugal focus means that people fail to recognise that they are constrained by time as well as by money. In fact, arguably we are far more constrained by time than money, because we absolutely cannot add an hour to our life, but we certainly may be able to increase our earnings.
Hourly wages
If you ask most people what their hourly wage is, they will reply with the amount their job pays them. If you are paid per year instead of per hour, you may find it useful to calculate your hourly wage based on a normal week’s work as a useful tool when curbing spending, since you can visualise spending decisions in terms of how long it will take you to pay for them. However, this not really the rate you should think about when time is also involved in a decision.
Utility of time
Utility is all about the value/joy you get from something. Your time has a value! Imagine yourself in this scenario:
Your TV has broken and you need to replace it. You can either order one online and it will be delivered to your door, or you can travel to the shop yourself which will take two hours in total. If the online and shop prices were the same, you would obviously choose the delivery option as you will save two hours. If the online price was £200 higher, most people would make the journey as they are willing to ‘exchange’ two hours of time and effort for £200. This means that the utility of their time is somewhere between £0 and £100 an hour. As you think about how much you’d have to save for it to be worth the effort, you start to hone in on how you highly you value your time.
It is interesting to think about how little a saving you would travel for. For me, it’s probably around the £10/hour mark, assuming I’m indifferent to the task itself.
Marginal utility of time
Next, it is worth considering that all hours are not created equally. If I have an entire free weekend, I’d probably make the two hour journey even for a £5 saving, meaning a £2.50 rate. However, if I am working weekends, getting home late, and would have to fetch the TV by cutting into sleep hours, you’d have to offer me a much larger saving, and I might decide that even a £50 saving won’t induce me to give up a precious two hours sleep when I am working lots.
‘Marginal’ just means extra, so if all of my hours are spent working (hello weekend accountancy classes), then the first free hour has a high marginal utility to me, which is why you’d struggle to buy it off me even at a high price. If I finish my studying (which might be true, my results are tomorrow), then I will have an abundance of weekend time, and the marginal utility from that extra hour is much smaller (if I have 30 free hours instead of 29 at the weekend, it doesn’t increase my happiness/sanity as much as the first hour did, so maybe I will go to pick up that TV, even for quite a small saving).
Most resources follow this pattern; the first of anything has a high marginal utility, but as you have more and more, the ‘extra’ value you get is reduced.
Why does this matter?
Most of us are bombarded by choices every day. When we make decisions such as eating out instead of cooking, or buying items without bothering to research cheaper prices, it is tempting to look back on these decisions as wasteful, and regret them. Learning how you truly value your time can help you to build time costs into your decision making process, allow you to see when it is logical to pay more, and to make peace with these decisions.
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