The traditional method for evaluating time vs. money goes like this:
If you earn $80,000 a year and you work 2000 hours a year, then your time is worth $80,000 / 2000 = $40 per hour
Simple, clean arithmetic. But this math ignores a vital economic idea, and it means that your time is a lot more valuable than you think.
In economics, marginal cost is the value of one more unit of production. A lemonade stand can easily illustrate this idea.
The setup of a lemonade stand could involve a physical “storefront,” equipment to squeeze lemons, a pitcher to hold the juice, etc. This setup could cost hundreds of dollars, and that initial investment is required to sell the very first cup of lemonade.
But each additional cup—one more unit of production—after the first cup only requires limited material: a paper cup, some ice, and a certain number of lemons.
The first cup has a very high marginal cost. Each additional cup has a low marginal cost. From the owner’s point-of-view, the first cup comes at a high marginal loss, but additional cups have a marginal profit. A certain volume of lemonade sales is required to break even, after which net profit quickly comes.
If you’re curious, this is why many start-ups lose money for years while quickly scaling up in size (think Tesla and Uber).
Apply marginal costs to your time
Let’s apply marginal costs to your time at work.
How do you feel about your first hour of work? Your 40th hour of work? Or what about your 70th hour of work?
Most people would suggest that the early hours are pretty easy, that the middle hours can be a drag, and that the 70th hour is seriously stressful. You don’t want to be answering emails at midnight, especially if it means missing out on the rest of your life.
But you have to pay your bills. You want to pursue your interests. You want to enjoy life. All of these desires sum up to this fact: you need money. You need those first X hours of employment in order for the rest of your life to feel fulfilling.
That number—X hours—will be different for each person. There’s some useful math to help you find your numbers. But these early hours are similar to the first few sales of lemonade. They are a requirement to make your lifestyle work.
But what happens beyond those X hours? You should value that time higher! Your demand for money has been satisfied and your supply of free time is limited. If an employer wants more of your time, supply-and-demand dictates that you should charge more for that time.
Of course, few of us can adjust our pay rates on a weekly basis. We can’t negotiate a raise just because a boss has asked us to work the weekend.
Instead, we can take this math into account when seeking new jobs, negotiating pay raises, or discussing end-of-year bonuses. Marginal costs are real, for lemonade stands and employees alike.
Don’t believe it yet?
If you’re still doubting this idea, here’s a simple example. Let’s use the “traditional” definition of the value of time. Two employees, Nancy and Larry, both earn $40/hour.
Nancy works normal hours, about 40 per week. Over the course of a year, she earns about $80,000. She sees her kids, they have fun on the weekends, she volunteers at the food kitchen. All normal for Nancy.
But Larry works ludicrously long hours. He’s contractually obligated to work 150 hours a week, meaning that he earns $300,000 per year. Of course, this workload also means that Larry has 18 hours per week for sleeping, eating, showering, etc. As I said–Larry is ludicrous.
Think about it: would you rather be normal Nancy or ludicrous Larry? If you’re simply driven by net worth, perhaps you like Larry’s life.
But if you said Nancy, it’s because the value of marginal time increases as the supply of free time decreases. The 40th hour of work is worth $40, but the 150th hour is worth far more.
It’s a simple idea. The rules of economics should apply to your efforts as an employee. And that means your time is worth more than you think.
Next time you have the chance, use the math behind marginal time to negotiate for what you’re really worth.