Freedom Life Planning

The Ultimate Guide to Financial Planning

The Money-Time Continuum

This article is about how time and money are inter-dependant and can impact each other. I will also explain how you can use one to maximize the other. I call it the Money-time continuum.

Many years ago, scientists and the general public believed that space and time were independent variables. That is, you can move around in space (forward/back, up/down, left/right) such as around your house or you can choose to sit still and time will keep passing by at the same rate. It was thought that your movements do not impact the passage of time. However, not too long ago in our human history, Albert Einstein helped pioneer a concept known as the space-time continuum by discovering links between your movement (or velocity more specifically) and the passage of time relative for you. It turns out that if you can move at insanely high speeds (approaching light speed) you can slow down time for yourself relative to others who are standing still. It’s a hard concept to grasp but has been confirmed by many experiments and today is used in our technology to have more precise clocks.

Well it turns out there is also an inter-dependence of time and money. This may sound obvious to some people who have heard the expression “time is money” but most people don’t really consider the full implications of this relationship between time and money. Time is money on the surface sounds like “hey don’t waste time, you could be earning more money”. But really that’s only one specific exchange within the Money-Time continuum that you can make on your way to reaching your goals. You see the most obvious relationship between time and money is how most of us make our money. We exchange our free time for money in the form of labour. Wake up Monday morning and dedicate 8-10 hours of your day or 40-50 hours per week to a job that then drops off a paycheck into your bank account for your efforts. Converting this to an hourly rate, you have a relationship between time and money, for example 20$ an hour for overtime worked. Assuming 80 years as the average life expectancy for a human being, that is about 700,000 hours. You are therefore making a continuous effort to give away 1 of these precious hours for 20$ of overtime pay.

It makes sense to give up some of your precious 700,000 hours for some cash as you need some money to sustain yourself and enjoy your life. Depending on your personality, you may want more money in exchange for less time to live the life style that you find is fulfilling. Some jobs will allow you to work over-time to take up a weekend shift to further increase the exchange of hours to dollars. However, what if you wanted to do the opposite? Convert money into more time? Well unfortunately, its not possible to directly extend your life with more money unless its paying for some life saving treatment you couldn’t otherwise afford. What can be easily done is to exchange money for more free time. Time you wish to use for the things that you enjoy such as traveling, spending time with family or being home working on a hobby.

The way to do this is through growing your investment value through index investing and saving up for early retirement. Every dollar that you save away into your investment account brings you one step closer to financial independence and having an extra 40-50 hours per week (plus commuting time of course) of free time. In addition to more free time you will also have much more energy to take on projects and activities that require a full day to tackle. But what is the exchange rate between time and money? Well I decided to crunch some numbers and I came across an interesting observation. You cannot directly convert dollars to time as it depends on a big factor. Your savings ratio. Your savings ratio is how much percentage of your salary you save every year and invest it towards retirement or financial independence. I played around with annual salary and it had no impact on saving time if you maintained the same savings ratio. You can double your salary but will not gain any time if you still save 30% of your income. In fact, doubling your salary either means you have a more stressful longer hours job or are doing a lot of overtime and therefore losing out on more time for no gain in early retirement. However, if you use the salary increase to raise your savings ratio, now you are converting money into time. Below is the reduction in years to retirement (or FI) for different saving ratios:

There are a few assumptions for this table:

  • No initial investment value, you are starting with nothing.
  • Salary and spending increase with inflation.
  • ROI pre-retirement (Pre FI) is 7% after inflation
  • ROI post retirement (Pre FI) is 4% after inflation
  • I did not consider fractions of years. The “years to FI” column is a round off to the near year.

Looking at this table, we see it is a non-linear relationship. But looking at the values in the middle of the table (20-50%) where most people are, a 5% savings rate increase results in about a 2-4 years reduction in your time to early retirement. So, moving forward I will use 3 years saved for every 5% of additional income saved.

3 years of working, at 40 hours per week + a 5 hour commute is 3 years X 45 hours X 52 weeks/year = 7,020 addition free-time hours per 5% savings ratio increase.

Now if you want it in terms of dollars to hours conversion ratio, you need to factor in two more variables. Annual salary and remaining life expectancy in years. Since this is now a two factor dependent relationship, the table below has to get a bit bigger.

At last we have a rough estimate of the exchange rate of dollars to free-time hours. It turns out, its not that expensive to convert dollars into more free time. Much less than you would think. If you are older, great news, the prices are even cheaper. That is because you still gain the same 3 additional years of more free time, while having less spending years ahead of you in which to average out the 5% spending cut.

If you make less money per year at work, you also get a discount. That also makes sense as you will be giving up 5% of a smaller income to obtain the same 3 years of additional free time. But hey, if you are making a lot more you can also afford a lot more, so giving up more per hour shouldn’t be too hard?

To use the table above for you, take the number 80 and subtract your current age. Find the closest number in the 2nd column from the left, then select the closest number in the first column to your annual salary. Jump to the right most column to see your estimated price of converting free time through increasing your savings rate. Multiply it by 2,340 if you want to know your total price for purchasing an extra year off work.

Now what would you prefer, to live a year longer or that extra money? That is a personal question and I am no way trying to persuade you of one or the other. Perhaps you love your job and want to spend more time doing it while balancing the rest of your life. Perhaps you are bored at work and looking forward to spending more time with your family. That decision is up to you, I am simply showing you the exchange rate of dollars to time to help with that decision.

It is also a number in which you can weigh major purchases against. Buying that 50k car, while you may be able to afford it, will cost you a year’s worth of free time. Is it still worth it? I hope this table and this blog post will provide you with some insight to make a better decision.

Be sure to check back soon as I plan to expand on these series of articles on the Money-Time continuum with additional ways to look at the relation and apply it towards your decision making.

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