Everyone budgets. Whether in strict spreadsheets detailing every penny spent or a more lenient mental note of where our money will go.
Regardless of the style or precision of a budget most will include similar items:
- Bills which may include rent/mortgage, utilities, and credit card/debt payments
- Miscellaneous expenses
- Savings (hopefully)
It's this last bullet point I want to talk about.
We put money aside for the future but what are we saving for? A vacation - emergency - down payment - retirement - there are many possibilities.
My perspective is this: I don't budget just to save - I budget to buy back my time.
This sounds a little strange at first so let me explain.
As unfortunate as it is, our time isn't truly our own. Nothing is free and just existing will cost us something. And this cost can vary substantially.
If you are able to drop everything to live in the woods and forage for food, your time will of course be cheaper than that of someone locked into a $4000/month apartment lease or paying off a $50,000 car loan.
This is where things can get tricky. The price of our time doesn't necessarily equate to more meaningful time.
Time is a strange commodity. We know it's limited and invaluable - and as humans, we are drawn to what is scarce - but we can't perceive it's limits.
We are tricked into thinking we have eternity.
This fails us because we risk letting the price of our time inflate to unsustainable levels and, in doing so, give up even more of the little we have.
The risk of inflated time
An inflated price of your time comes from an inflated lifestyle.
Often, when we find ourselves with a surplus of money - whether due to a raise or a bonus or whatever the case - we close the gap with things we don't necessarily need.
We've earned it after all.
I'm guilty of this myself.
When I started my new job a few months ago, I splurged on a new tv (and I'm still happy about the decision!).
It doesn't have to be big ticket expenses either. Things like eating out, morning coffees, taking an Uber instead of walking- they are conveniences that can add up quick.
And there's nothing inherently wrong with enjoying these things.
What's important, however, is being mindful of this lifestyle creep and setting a limit on what can be spent and what should be put away to ultimately buy back your time.
I want to do a bit of math to explain what I mean when I talk about buying back time.
Let's take someone who averages $20 per hour after taxes which equates to $41,600 a year (assuming the awful but common 40 hour week) of spendable income.
If their lifestyle lines up closely with their after tax income (living paycheck to paycheck) then the cost of their time is:
$40,000/8760 (hours in the year) = approximately $4.56 per hour.
Now, what if that person is able to live off of $35,000 per year while still bringing in the same salary:
$35,000/8760 (hours in the year) = approximately $4.00 per hour.
The math is simple enough. We see about a 13% decrease.
But there is more to this story.
Let's look at both scenarios in 10 years. We'll use a modest 5% interest rate.
I want to note that we can't know how markets will look 10 years from now. So, while 5% interest is comparably modest to what some personal finance advocates will say, it's impossible to guarantee.
Saved: $1,600 x 10 years
Total (with 5% annual interest): $21,130.86
Total / $4.56 = 4634 hours
Over $20,000 isn't bad. I wouldn't complain about that. However, when you compare that to the $40,000 needed to live for a year, it's barely half.
If a person in Scenario A were to lose their job or need some personal time off of work for any reason, they would have at most 6 months of expenses covered.
Saved: $6,600 x 10 years
Total (with 5% annual interest): $87, 164.80
Total /$4.00 = 21,791 hours
That's a big difference.
If you take the route of Scenario B, in the same period of time, you'd be able to buy back around 2.5 years of your time!
How to get started
It's never too late to start thinking about buying back your time. Some people will refer to this as retirement but I don't really like that word.
Retirement typically conjures up thoughts of sipping margaritas on the beach and playing golf all day. For me, those things would get old quick.
I think it's better framed as financial independence which boils down to owning your time.
It's something I think everyone should be aiming for, regardless of whether they feel it's possible or not.
There are a couple ways to get started.
If you've accumulated debt, not only do you not have the ability to buy back your time, you actually owe your time to others.
Once all debt is paid off, then the real journey can begin.
Whatever you can do to get those balances down, start now.
This is an important topic that I plan to revisit in a future post.
This comes in two forms:
- Earn more
- Dial back your lifestyle
A healthy mix of both is ideal but I'd say you have more control over the latter. We can't always ensure that we'll get that promotion or our side business will make money. If you find ways to cut unnecessary expenses from your current life, you'll be taking a step in the right direction.
I've mentioned this before, but it's always about finding the right balance. I will never recommend forsaking all short term leisures for some imaginary future but the opposite holds true too.
We trade our time for money. This is what we call work.
We trade our money for goods to support our lifestyle. This can range from necessities like food and housing to nice-to-haves like luxury cars and dining out.
What money is left over can then be stashed away (and hopefully put to work) so that we may eventually own our time.
Feel free to comment on this post or reach out on Twitter!
This post was also published on Medium.