I was recently talking with a colleague who said he was close to retiring. Gil (not his real name) is in his early fifties and slightly quirky. He’s the type of guy who marches to the beat of his own drummer. Although he works for a large, corporate-think company, he sports a long beard and tattoos. He’ll freely talk about politics and other matters that most folks would shy away from. With his wife, he lives in the country – far away from the hustle and bustle of society.
It had been a while since I talked with Gil so his mention of retirement was exciting. I told him congratulations. He said he was more than ten years ahead of what society had scheduled for his retirement, mostly because he’d been debt free, including his home, for many years. He’s got a rental house which has some debt on it, but that payment is being covered by someone else.
I loved hearing he was free of consumer debt and asked him what led him to that point. Almost everyone who is debt-free has a story about a moment of awakening to the soul crushing weight of financial liability. Gil said he got himself into a position to retire, based upon some advice he was given when he was young. Gil said once he fully grasped that concept, his life changed.
Being on a quest for knowledge that can help me grow, I immediately asked, “What was it?”
The advice, he said, was, “You don’t buy things with money, you buy them with time.”
Money is Time
I loved that advice and have chewed on it for some time. It took me back to a point in my life when I made an hourly wage. It’s funny because when I was paid by the hour, I looked at money just the way Gil had described it. Time in exchange for money.
In my sophomore year of high school, I got my first “real” job. It was 1985 and I bagged groceries at Albertson’s for $3.25/hour. I loved that job. Interacting with the customers, learning new things, and the people I worked with made it a fantastic first-job experience. Some weeks I worked as little as twenty hours and others I worked forty or more (usually the summer).
When I got that paycheck home, after factoring in taxes, I would calculate how many hours I worked for that money. Then I would back out how much things cost me. It was a good system, and one I would have been smart to keep in mind.
Unfortunately, I didn’t.
What’s Your Time Worth?
We have all heard the phrase, "Time is money." How come we forget to think in terms of it then?
Let’s look at today’s market. The federal minimum wage in the United States is currently $7.25/hour. In my home state of Washington, it is $11.50/hour. We’ll skip all discussions of whether either of the minimum wages are good or bad – they just are.
An hourly wage earner, unless they have yet to receive their first paycheck, soon becomes very acquainted with taxes. In my mind, it’s the first slap of adulthood that anyone faces. Welcome to reality, kid – now pay up.
After the government takes its share – in the form of federal income tax, state income tax, social security tax and Medicare tax – what you have left over is what you get to spend.
This isn’t a diatribe on taxes. We need infrastructure, emergency services and the military. Rather, it’s just a reminder that we don’t keep 100% of what we’ve earned. I think we forget that sometimes until it’s mid-April and our taxes are due.
Let’s assume a forty-hour workweek at $10/hour (I like easy math).
40 x $10.00 = $400.00
Now, let’s factor in the total of all the taxes nibbling at your paycheck at 20%. For some it may be less since you won’t have a state tax. Again, I’m using simple math and picked a nice easy number we should all be able to do in our heads. Relax and don’t get all “That’s not the exact number for my taxes, man!” Work along with the concept.
$400.00 x 20% = $80.00
What you have left …
$400 - $80 = $320
So we thought we were working at $10/hour when we’re really working at $8/hour. (The government is taking 20% or $2/hour, get it?).
Now, here’s where the “you buy things with time” concept comes in.
Our friends want us to go out with them to a fancy pizza joint. Sounds fun, right? Let’s get a pizza and a pitcher of beer. We’re feeling like a big hitter because we just got paid so we offer to pay. The tab comes to $32 so we tip 20%, bringing the total to $38. We pay with cash (we’re good that way) and head out the door.
This is where we need to stop and think about the advice:
You don’t buy things with money, you buy things with time.
How much did that dinner with friends cost us?
$38 / $8 per hour = 4.75 hours.
That pizza and beer cost more than half a day’s worth of work.
Was it worth it?
Only you can decide.
But I’m on a Salary …
Admittedly, it’s been a long time since I looked at life like this. Sometime in my late twenties, I moved to a salary-based position that paid me well. My head was in the clouds and my financial position was in the toilet. I had no idea what I was doing.
Now that I’ve cleared up my finances, I am in a commission-based industry where I’m paid on deals done, not hours worked. I can spend one hundred hours on a deal that dies at the goal line or I can work two hours on a deal that falls into my lap which will feed my family for months. It’s a crazy industry, but I can still do the math. I just have to do it backwards.
Let’s assume I make $100,000 per year.
Again, assuming 40 hours per week x 52 weeks, that’s 2,080 hours.
$100,000 / 2,080 = $48/hour
Awesome, we found an hourly wage, but I need one more step to help me think along with the time and money concept.
Let’s raise the tax implications slightly to 25%. As an independent contractor, I’m responsible for the self-employment tax rate of roughly 15% (which covers both the employee’s and employer’s contribution for social security and Medicare taxes). Yours might be higher - don't get all crazy on me. Again, this is a rough number and used only for illustration (easy math, remember?).
So, continuing to work back to an hourly wage…
$100,000 x 25% = $25,000
$100,000 – $25,000 = $75,000
$75,000 / 2,080 = $36/hour
Okay, so the wage we’re really talking about is $36/hour. That’s fantastic!
Until you think about buying some new things…
How about a pizza and beers with friends?
$38 or 1.05 hours – Um, yeah! Let’s do it.
How about a new 75” Samsung LED 4k Ultra HD TV?
$2,300 or 64 hours or 8 eight-hour days – Huh.
How much does a new Dodge Ram truck cost?
$45,000 or 1,250 hours of work which is equal to 156 eight-hour days – Ugh.
I’m not saying people can’t buy the Ultra HD TV or the new Dodge Ram truck. That's a decision only you can make. However, when you start factoring the cost of these things as time, it’s incredibly sobering.
Do I really want to give up five months of my life in exchange for a new Dodge Ram?
How to Leverage Time
This is a real estate and personal finance blog. Here is one of those great opportunities where I can bring two concepts together in a dramatic way. If you’re not a fan of real estate, I hope you’ll stick around for a few minutes more, because this is where it gets exciting.
You see, I love this advice, “You don’t buy things with money, you buy them with time.” I’ve thought a lot about it and I think it holds a secret within its words.
The advice doesn’t define money and time as “your” – as in your money or your time.
Therefore, you can leverage either the money or time of others to help you achieve your goals. It’s the leveraging of other’s time that I think people often forget. We often talk about leveraging other people’s money (borrowing) to get real estate.
I own a duplex. I initially had to invest my own time and some capital into purchasing the property. However, every month I receive two checks that exceed all my related expenses (mortgage, taxes, insurance, utilities, etc.) which then builds up a nice little annual reserve. Those two tenants are spending their time to pay their rent.
However, they are giving time back to me. For example, if I clear an extra $300/month on that duplex and my effective hourly rate is $36/hour (calculated above, remember?). How much time was just given to me? In other words, how many less hours did I have to work to earn $300?
$300 / $36 = roughly 8 hours
I get almost eight hours of equivalent work through the cash flow on that property.
That blew my mind when I thought of it that way.
Okay, okay, I know I’m not actually creating time, but I am getting the benefit of their time. The more tenants I have sending rent to me, the more I have leveraged their time.
I may not be creating time but I’m using it more efficiently now. Get it?
If you own a business you may have already thought about the concept of leveraging your employee’s time. I have owned a couple businesses and did exactly that. But I never applied it to a tenant. Why not? It’s the same concept except that I don’t have to manage their day-to-day work activity. I believe this way is better. The tenants go about their lives and send me a check on the first of the month.
The older I’ve gotten the more precious time has become. I wrote a post detailing a discussion with my daughter that one morning your twenty-two years old, the next morning you wake up and you’re forty-four. I had that discussion five years ago, yet it feels like yesterday.
In my youth, I treated time like it didn’t matter. I think most people do. As I got older and realized how precious it was, I started saying, “I can always make more money, but I can’t make more time.”
I thought I was being smart with the statement, but I realize now it was just another platitude to make myself feel okay while I was being a ding-dong. I gave it no thought.
If you are working for your money, then money and time are interlinked. It’s only when you can leverage the time of others, that you can begin to loosen those bonds that link the two.
When we start looking at money as time, then we have the obligation to be even more careful with it than before.