The 30-second version

• Keeping your job costs you money and time.
• You probably don’t consider these costs when you think about how much money you earn.
• Most people’s “true” hourly rate is half what they think it is.
• Your “true” hourly rate also represents how long you have to work to earn $1.
• Expressing the cost of something you might purchase in terms of the energy you must exchange for it could really change the way you feel about spending that money.
• Coffee can be more expensive than a computer.
• Understanding the value of our life energy was an instrumental part in our journey towards financial independence.

The Details

I have referred to life energy value of money before, most recently in an article about an LCD projector we bought to use as a mobile TV. In it, I said:

A portable TV capable of 1080P for less than CAD 600. Not bad, and an easy value to compute. Even at 8 minutes of life energy per dollar (approximately $30k/year salary), the entire setup costs you 80 hours of pre-tax energy, and I’ll bet you’ll enjoy the projector for more than two weeks.

How did I compute this number? What does it mean? Let me tell you.

I learned in Your Money or Your Life how to express an amount of money, say the cost of something I’d like to buy, in units of life energy. As they put it, I can compute how much of my energy I must trade to pay for this thing I want to buy. When I worked at IBM, I made the calculation roughly like this.

Here I’ve started with my overall salary after taxes in the left-hand column and the amount of time I spend in the office working in the right-hand column. I show you the calculation at the scale of a year, but I’ve done it at the scale of a week and a month, too. If you try this, then choose whichever scale that you find easiest to think at, and pro-rate everything else at that scale. I have found that scaling this to year helps me remember once-per-year expenses like vacations.

Although I had a salary of $82k, I had net pay of $56k per year, so I calculated based on that. Nowadays, my personal tax rate stands much, much lower.

I counted all the costs in time and money associated with having a job. I kept asking myself, “If I didn’t have to keep my job, would I spend this money?” Every time I answered “no”, I added it to the list. All costs mattered. I had a long list. At the end, I subtracted all the money costs from my salary and added all the time costs to my time working, which led me to the figures at the bottom of the table.

At the top of the table I computed my hourly pay rate on paper. In this case, $56k / 2250 hours = $24.89/hour. At the bottom of the table I computed a much more accurate hourly pay rate, taking into account the cost of keeping my job. In this case, $39.9k / 3585 hours = $11.13/hour. I had had no idea.

Most people learn that they earn a true hourly rate about half as high as their pay stub leads them to believe.

The next step involves taking the reciprocal, whose unit is “hours/dollar”, which I usually express in minutes per dollar by multiplying by 60. In my case, 60 / $11.13/hour = 5.39 minutes per dollar. What did that mean?

I chose to exchange 5.39 minutes of my life energy to earn $1 by working where I worked and how I worked.

Now I could quantify purchases big and small in much more concrete units, and we humans tend to judge things more accurately when we have more concrete information. The morning coffee at Second Cup? (Forgive me; I knew not what I drank.) cost $1.50 or 8 minutes. Every day. It took 8 minutes to stand in line to get the coffee. Not worth it. A new MacBook Air? $2,000 or 10,780 minutes or almost 180 hours. Given how much time I spend online, I could easily justify one of those per year as long as I have the discretionary funds to spend on it. A new first-baseman’s glove? $200 or 1,078 minutes, almost 18 hours. Back then I played softball every week all summer and really enjoyed it, so 18 hours seemed a small price to pay.

Now I had a less abstract, less intuitive, and perhaps more meaningful way to evaluate the utility of a purchase. This helped me decide which expenditures I valued (the computer) and didn’t value (Second Cup’s crappy coffee). This played a central role in our personal financial strategy: we expressed our expenditures in life energy units, which helped us identify the expenditures we didn’t value, then we stopped buying those things. We must have saved 40% on our discretionary spending.

Awareness of the money we spent is just one of the ways we have learned to free our minds to do great work.