MAKING EFFECTIVE USE OF YOUR TIME
Step 7. Automating/systemizing your task
B. Becoming a smart consumer
We often buy things without checking whether they’re worth our money (and time). To assess whether you should buy something, calculate how many hours you need to work in order to buy it. Let’s say you want to purchase a
new phone that costs $900. If you earn $15 per hour, you’ll need to work 60 hours before you can acquire it. Now, is that a lot or a little? I don’t know. It depends on how useful you think the phone will be. Perhaps, buying a less expensive model would be good enough for you. Or, perhaps, you absolutely love that particular phone and want to buy it, irrespective of the cost.
Understanding hidden opportunity costs
It is important to understand that with every purchase you make there is an opportunity cost. You cannot both spend your money on a new phone and save it. Each dollar spent is a dollar not invested. In other words, each dollar spent is accumulated time you’re voluntarily giving away (i.e., the time you’ve “stored” by making that money through work).
And because the money you invest can increase multifold over several decades, what you choose to buy or not to buy is much more important than you think.
For instance, let’s say you’ve just got your first job out of college. Excited to be making money and eager to reward yourself, you decided to buy yourself a nice car. To do so, you take a $30,000 loan that you will repay over the course of several years. There’s nothing wrong with that, is there? After all, you’re making money now. However, this seemingly inoffensive purchase comes with huge opportunity costs.
Let’s say the total cost of the loan, including interest, is $40,000. Then, let’s assume it will take you eight years to pay the loan back in its entirety. In this case, you’ll have to pay back $417 per month, which is $417 you won’t be able to use for anything else each month.
Now, what if you chose to invest the $417 each month for eight years at an annual return of five percent after inflation? By the end of the eight years, you’ll have amassed $47,783. But that’s not the most impressive thing.
Imagine you decide to let that money compound over a few decades, never touching it before retirement. Let’s be conservative and use thirty years. At the end of this thirty-year period, you’ll have amassed $206,515.98. Not bad, eh?
Having this much extra in the bank will give you more options. For example, you might be able to:
Retire a little earlier than planned, or
Have a higher monthly pension when you retire.
My point is this. Saved money happens to be stored time. By saving or investing your money instead of spending it, you can buy back time in whichever way you please. For instance, you can:
Outsource unpleasant tasks to free more time to do things you enjoy, Retire early and dedicate that extra time to your hobbies, or
Change career and go for a more meaningful job, and so on.
You can always make more money, but you can never acquire more time.
Therefore, make sure you use your money as a tool to store time. And if you want to both spend more and save more, you must find a way to increase your income.
In the table below, I have added a few more scenarios to give you an idea of how powerful the compound effect is. You’ll see what happens if you earn a seven—instead of a five—percent return, or invest your income for forty instead of thirty years.
I’ve also included another example showing you how much you would need to invest over a forty-year period to accumulate $1 million (assuming a seven percent annual return). Spoiler: you need to invest $390 per month.
Note that the average historical return of the S&P 500 since its creation in 1926 is slightly below ten percent, before inflation. (The S&P 500 is a stock market index that measures the value of the 500 largest companies traded on U.S. stock markets.)
Action step
Write down a few things you’d like to buy.
Then, calculate how many hours you must work to buy them.
Finally, see if there are any alternative options. Can you buy something less expensive while getting more or less the same benefits? Or should you merely give up on buying those things because you can use the money more effectively?
3
DISCONNECTING TIME FROM MONEY
As our old friend Warren Buffet once said, “If you don’t find a way to make money while you sleep, you will work until you die.”
Time is much scarcer than money. Now, I understand that if you have money issues right now, it might definitely not seem that way, but the more you learn to value your time, the more money you’ll likely make over a long enough period. It won’t happen tomorrow, but if you’re patient enough it eventually will.
In this section, I’d like to discuss the importance of disconnecting your time from the money you make. There is a large amount of work involved in mastering this concept, but I will give you a brief overview to help you shift your mindset regarding time and money.
To learn more on the topic you can start by reading, Rich Dad, Poor Dad by Robert T. Kiyosaki or The Millionaire Fastlane by MJ DeMarco.