December 20, 2011

Your time is not worth that much

I noticed a lot of people in the startup/programming/HN community seem to measure their time in the equivalent of how much money they could be making during that time.

For example, you ask a friend to do something for you that takes 2 hours, and they tell you that in those 2 hours they could be making 300$ because that's their hourly rate if they were doing freelance work. So essentially if they aren't paid for these 2 hours they are basically loosing 300$.

I say this way of estimating how much your time is worth is flawed.

The only time this estimate is true is when you have a guy waiting at your door 24/7 for you to open it and give you work, and let you charge him 150$/hr for that work (per the example above).

Given any other time, your time estimate is probably way off. Because if you don't have work available NOW at the rate you're estimating yourself to be worth, your time is just not worth as much as you think it is. In fact, if you don't have any work lined up for that rate, your time is worth almost nothing. It's free time.

Could you be making money during your free time? Yes, however if you are not ready at that very moment to take on the work at your going rate, your lost opportunity cost is not 150$/hr, but 0$.

The other problem with correctly estimating what your time is worth is how easy it is easy to overestimate. I mean hey, in this next hour that I don't do anything I could be making a million dollars by winning the lottery. So my hourly rate is a million dollars. Just like the example above, that rate IS possible, but highly unprobable not to mention ridiculously unsustainable.

To dig in further, the wiki informs us that: 

"The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently" 

And that's a good thing. If you're wasting your time on the couch picking your nose, you could be doing much better things with your time (Eg. creating something useful for others and getting paid for it too)

Some people however have the tendency to put a dolar value on EVERYTHING in their lives. And sadly it's a rather limited world view when everything has a dollar value and an opportunity cost.

News Flash: Not everything in life has a dollar value

The wiki has a fairly straight forward example of this

"Opportunity costs are not always measured in monetary units or being able to produce one good over another. For instance, an individual could choose not to mow his or her lawn, in an attempt to create a prairie land for additional wild life. Neighbors of this individual may see this as unsightly, and want the lawn to be mowed. In this case, the opportunity cost of additional wild life is unhappy neighbors."

We are not robots and life is not a well written ruby script (as some would like to believe).

You can always look at everything in terms of the lost opportunity cost (and the dollar value associated with it), however, often the lost opportunity cost in dollars is far less valuable as an indicator of how much your time is really worth, and in some cases it can't even be used to accurately describe the lost opportunity cost, such as the opportunity cost of non-tangible things.

For example, spending 2 hours playing with your kids or volunteering and genuinely helping out another human being, is INFINITELY more important, beneficial and fulfilling than your lost opportunity cost of 300$ that you could be making doing freelance work.

So to sum it up, while it's good to have a perspective about how much your time is worth, don't over do it.

There are obvious cases when estimating your time makes perfect sense, but breaking down your entire waking time into lost opportunity costs is a bit too much in my opinion.

Just like with most things in life, aim for moderation.