Time Is Money
Benjamin Franklin is often quoted as saying, “Time is Money.” However, we rarely hear this equality listed in the other direction. The truth is that time is money, but money is also time. Suppose that you put away $1,000 into savings right now, and you want to figure out how much time you just bought. Although this is a complicated question to answer, we can get a good estimate by answering just a few more questions.
How much money do you need to live for one year?
Imagine that you need $52,000 per year to live. Assuming you put that savings into the bank, and you just want to withdraw your money until it runs out, then your money would last you an entire week! Congratulations! Of course nobody who is getting rich young would uproot his or her life with only $1,000 in savings, but this exercise does two important things.
First, it gets us into the mindset that money is time. How much is that $5.50 coffee from my fancy coffee shop in the morning costing me in time? Just under an hour for every single cup!
$5.50 * (1 week / $1,000) * (7 days / 1 week) * (24 hours / 1 day) * (60 minutes / 1 hour) = 55 minutes[1]
Now imagine that you buy just one cup of coffee 5 days each week for 10 years. That’s the equivalent of over 2,400 hours or 100 days! Over a typical 40 year working career that makes over 400 days. Just think, buying coffee on your way to work is costing you over a year of freedom by the time you retire.
So the next time that you go to get that latte from Starbucks, ask yourself if it is worth an hour of your freedom for that one cup, and is it worth a year of your life to have that habit? If the answer is yes, then go for it. Spend that hour! Just realize that that is what you are doing
Second, it shows us the importance of cutting down our expenses, especially our recurring expenses.
Let’s say that you have awakened to how much that premium coffee every morning is costing you, but you just can’t make it through the workday without a cup. Just by going to Dunkin Donuts and spending $2.50 on an also fancy cup of coffee, you are saving over a half hour every single time you get one! That means you’ve saved 50 days over 10 years and 6 months by the time a typical person retires!
The real power in these realizations is that it works for everything. Not just coffee. Think about all the little impulse buys, all the quick trips to the fast food restaurants, all the subscriptions we have. Every $1,000 grants somebody who needs $52,000 per year to live 1 whole week of freedom if needed today. If $1,000 is saved every month, that’s 3 months of freedom for every working year. Now if the little costs are cut, that money goes even further.
Where is the money invested?
This guide is about to get even more powerful. Now that you’ve learned the importance of cutting your expenses and saving, it’s time to learn how to make those dollars work even harder for you. Let’s revisit the coffee cup example over a period of time and assume that you invest your money instead of just sticking it in the bank. If you earn a 7% return on the money that you’ve invested then that same $5.50 daily cup of coffee now costs you over 194 days in ten years and over 7 years 6 months in a working career!
For the frugal coffee connesiour at only $2.50 per coffee the numbers work out to over 88 days in 10 years and about 3 years 6 months over a working career.
Now you start to see the true power of cutting your expenses. Just $1 every single day is worth more than a full year after a working career to the person who spends $52,000 every year.
What is your safe withdrawal rate?
The final lesson in learning how much time your money is really worth is by figuring out what your safe withdrawal rate is. The often cited Trinity Study suggests that a portfolio of stocks can survive a safe withdrawal of 4% of the initial balance, adjusted for inflation every single year thereafter can survive extended periods of time in the great majority of cases, but more on that later. What this is means is that for every $100 you invest in stock portfolio, you can take out $4 this year and then increase that $4 by the rate of inflation forever, and in most cases, you won’t run out of money.
There are some criticisms suggesting that 4% is not the correct safe withdrawal rate, but that is what the study has shown. If you want to be safer, just adjust that number lower. You can also be safer by deciding to take less money out in years that the market does poorly. Many arguments and counter arguments will be discussed in a future guide.
The real takeaway for now is this. Once you find your safe withdrawal rate, you can figure out how much money equals the rest of your life. Assuming a 4% safe withdrawal rate and that you need $52,000 per year to live:
$1 = 24 seconds every year forever ($0.04 / ($52,000 / 1 year) * (365 days / 1 year) * (24 hours / 1 day) * (60 minutes / 1 hour) * (60 seconds / 1 minute))
$10 = 4 minutes every year forever ($0.40 / ($52,000 / 1 year) * (365 days / 1 year) * (24 hours / 1 day) * (60 minutes / 1 hour))
$100 = 40 minutes every year forever ($4 / ($52,000 / 1 year) * (365 days / 1 year) * (24 hours / 1 day) * (60 minutes / 1 hour))
$1,000 = 6.7 hours every year forever ($40 / ($52,000 / 1 year) * (365 days / 1 year) * (24 hours / 1 day))
$10,000 = 2.8 days every year forever ($400 / ($52,000 / 1 year) * (365 days / 1 year))
$100,000 = 4 weeks every year forever ($4,000 / ($52,000 / 1 year) * (52 weeks / 1 year))
$1,000,000 = 9.2 months every year forever ($40,000 / ($52,000 / 1 year) * (12 months / 1 year))
$10,000,000 = 7.7 years every year forever ($400,000 / ($52,000 / 1 year))
Yes, you read that last that last line correctly. If you happen to invest away $10,000,000, then every single year, your money will be buying you another 7.7 years of freedom. In other words, your money will be making more money than you spend every year and your net worth will snowball.
To finish off this guide, let’s combine the lessons from above. Let’s assume that you realize how much time your money is really worth and you decide that you can cut your expenses down 30% to $36,400 per year.
$1 = 34 seconds every year forever ($0.04 / ($36,400 / 1 year) * (365 days / 1 year) * (24 hours / 1 day) * (60 minutes / 1 hour) * (60 seconds / 1 minute))
$10 = 5.7 minutes every year forever ($0.40 / ($36,400 / 1 year) * (365 days / 1 year) * (24 hours / 1 day) * (60 minutes / 1 hour))
$100 = 57 minutes every year forever ($4 / ($36,400 / 1 year) * (365 days / 1 year) * (24 hours / 1 day) * (60 minutes / 1 hour))
$1,000 = 9.6 hours every year forever ($40 / ($36,400 / 1 year) * (365 days / 1 year) * (24 hours / 1 day))
$10,000 = 4 days every year forever ($400 / ($36,400 / 1 year) * (365 days / 1 year))
$100,000 = 1.3 months every year forever ($4,000 / ($36,400 / 1 year) * (12 months / 1 year))
$1,000,000 = 1.1 years every year forever ($40,000 / ($36,400 / 1 year) )
$10,000,000 = 11 years every year forever ($400,000 / ($36,400 / 1 year))
Just as you probably guessed, every dollar is worth even more because you don’t need as much year in and year out. What you may not have realized though is that now that you’ve seen the light and reduced your expenses you have another $13,600 to save every single year than you had when you were spending $52,000 every year! That’s right, you get an amazing double whammy by spending less and investing the rest.
In order to figure out how much money you need to reach financial freedom. Simply plug the following numbers into a calculator.
(The Amount of Money I Spend Every Year) / (Your Safe Withdrawal Rate)
[1] Most numbers in this article have been rounded for simplicity
Continue the Discussion:
How much time do you have saved away?
