How to value your time in monetary terms?
In the field of finance and investments, time is money.
Ever questioned an investment project solely because it’ll consume too much of your time?
To improve your time and work management, it is a vital skill to know how to value your time.
There are 2 effective ways of valuing your time in monetary terms: discounting and opportunity cost.
What is Discounting?
iscounting is the process of calculating the time value of money today for an investment. 
Given that inflation increases every year, one dollar today is worth more than one dollar tomorrow.
Essentially, discounting the “returns” or “cash flows” of the investment allows you to decide if the investment is worth your time.
Why bother understanding this term?
Discounting is a financial method that all finance professionals use on a daily basis, it not only applies to time valuation, it is also used in property valuation, buying or selling stock decision analysis, mortgage calculations etc.…
You could also think of it in this way: Think of discounts in a retail shop (discount rates).
The higher the discount rate, the lower the final price of the product is. Thus, the merchant receives less money in the end. The same applies to investments. The higher the discount rate, the less money you’ll receive in return.
Understanding more about the Discount rate
It is often hard to measure the exact percentage of the discount rate. But a good reference point would be 2% because that’s about the global inflation rate per year.
All investors would want to at least earn 2% to fight against inflation.
Therefore, everyone’s discount rate would start at 2%, and it would increase according to an investment’s overall riskiness.
The riskier the investment is, the higher the discount rate.
A high-risk investment project can have a range 10% to 30%, while a low-risk investment could be anywhere between 2% and 10%. (Note: These numbers are adjustable according to one’s perception of riskiness and dependent on the industry of the investment)
For those who want to understand this concept mathematically, I’ve illustrated an example below.
For those who aren’t interested about the mathematical calculations, skip to “What is Opportunity Cost?”
Mathematical Explanation:
You are offered two choices of investment projects, and you have no idea which one is better. So, you decide to use the discounting method to compare them.
Project A: Generates $1,000 USD of income every year and the discount rate is 2% (Investment time period: 5 years)
Project B: Generates $1,100 USD of income every year and the discount rate is 6% (Investment time period: 5 years)
We can see that Project A is less risky compared to Project B because it has a lower discount rate.
Most investors would select Project B because it generates more cashflow, but in fact Project A has more value after accounting the discount rate.
If you would like to see the precise calculations, I’ve created a excel spreadsheet to show my work.
The rule of thumb is:
Whichever project has the greatest “Present Value” should be accepted and the alternatives should be rejected.
Congrats! Now you have learnt how to determine which investment project more worthy of your time and energy.
However, there are other factors that you should take account of when valuing your time, such as opportunity cost.
What is Opportunity Cost?
“Opportunity cost is the value of what you lose when choosing between two or more options” (The Balance, 2021)
Another way of valuing your time is understanding how much is your time worth per hour?
Conduct a self-audit:
Be sure to take into account that your value of time is higher when you’re young.
Why?
Because when you’re older, you won’t be able to grind like a beast for 14 hours a day and will more likely have other priorities to attend to such as a family.
Is there something you could do that is a better worth of your time?
Are you spending too much time on things that doesn’t critically matter to you?
Are you doing things that aren’t making you happy?
What is something that you enjoy doing that is worth more than money?
**Your opportunity cost of time is exactly how much your time is worth.
How can you decide if you should take on an investment project using the opportunity cost method?
The rule of thumb for opportunity cost is: if you believe that there is something you prefer doing instead of spending time in an investment project, you should abandon the project.
However, if you believe that this investment project is a rare opportunity, and it is something enjoyable to you, you should accept the project.
Key Takeaways of this blogpost:
In the field of finance and investments, time is money.
2 methods of valuing your time: Discounting and Opportunity Cost.
Discounting is the process of calculating the time value of money today accounting for inflation.
The present value of each project is what the investment project is worth today in cash.
Whichever project has the LARGEST “Present Value” should be accepted and the alternatives should be rejected.
“Opportunity cost is the value of what you lose when choosing between two or more options.” (The Balance, 2021).
The rule of thumb for opportunity cost is: if you believe that there is something you prefer doing instead of spending time in an investment project, you should abandon the project.
Both methods are equally effective and good to use. I prefer using the opportunity cost on a daily basis because it is something I can quickly apply.