Question

Briefly summarize how this article relates to Time Value of Money particularly useful or timely, and give your personal reactions to the article.

It's times like these that I plaintively cry for my phantom butler. True to form, he never shows. Then, begrudgingly, I clean up � which doesn't really take that much time. But added to all the time I took to sidestep the growing mess and pretend it doesn't bother me, it's another ring on my tree trunk. So I'm left wondering: Is it worth it for me to get a housekeeper? To help answer the question, I talked to two economists. (Yes, the perks of my job are without number.) Ian Walker of the University of Warwick in England came up with a formula a few years ago to help assess the monetary value of your time. He takes into account your gross hourly wage, your marginal tax rate (the top tax rate you pay), and the cost-of-living in your area. The formula is based on the assumption that what you make is an indication of how you value an hour of your time because that's what you're willing to sell it for to an employer. Theoretically (although not practically), you could always be working and earning money instead of cooking, mowing the lawn, doing the laundry, etc. But the worth of your wage also depends on the cost of living in your area and your taxes, since they determine how far your wage will go when it comes to spending it. Here's Walker's formula (algebra-phobes may want to close their eyes now): The value of your time = [Wage(100-Tax rate)]/Cost of living. Say you're single in San Diego making $75,000 a year. Your gross hourly wage is roughly $36, assuming you're paid for a 40-hour week, 52 weeks a year, including vacation. Your combined marginal tax rate (federal + state +local) would be 37.3 percent, according to tax publisher CCH, Inc. And according to ACCRA, which compiles cost-of-living indexes, your cost of living number is 137.3, meaning the cost of living in San Diego is 1.373 times higher than the national average (100). By Walker's formula, the value of your time is $16.44 per hour. Or: [36(100-37.3)]/137.3. So say you're debating whether to launder your shirts or send them out. If it takes you two hours to do your shirts (time you might value at $32.88) and the laundry service can do it for the same or less, you might conclude it's a worthwhile purchase if you'd rather do something else with your time. Don't forget quality of life The formula, however, isn't perfect. For instance, it doesn't distinguish between earned income and investment income, which are often taxed at different rates. Plus it's hard for most of us to figure out our effective tax rates (the rates you actually pay after you take deductions, etc.). And it's hard to get a current cost-of-living number specific to where you live. (Attached is a partial list.) The formula also assumes the value of your time is constant. Practically speaking, that's not the case, said Daniel Hamermesh, an economist at the University of Texas. He notes the value of his time in summer is probably less than during the school year when he's at his busiest. It also can't offer a way to value the pleasure or displeasure you take in performing a task. That should be a top consideration when assessing the value of your time, since time is a finite commodity for all of us, and how we spend it determines our quality of life, Hamermesh said. You may choose to paint a room in your house because you enjoy it, even though the opportunity cost of your time is high, while the cost of a painter by comparison is low. Conversely, you may choose to eat out more often because you dislike cooking. Lastly, the formula doesn't account for the fact that paying for a service may be worthwhile if it's for a task you don't do very well. Hamermesh uses the example of a plumber, who may cost you more per hour than you could net at work, but that's money well spent if you're an idiot when it comes to fixing toilets. Or ... just wing it All this assumes, of course, that you have discretionary income (after-tax money left over after paying the bills). Of course, most people aren't able to afford all the things they desire. So you'll have to rank your likes and dislikes and your level of competency at various tasks, in addition to roughly gauging the monetary value of your time to determine if a service is worth your money in exchange for free time. But at the end of the day, Hamermesh implied by way of example, you shouldn't think too hard about the question. A colleague of his pointed out the tremendous complexities that go into passing a car on a two-lane road. You've got to assess your velocity, the velocity of the car in front of you and the velocity of the car coming toward you in the other lane. "But you don't do a differential equation," Hamermesh said. You make your best guess, pass the car and most of the time you don't get in an accident. Well, there it is. I'm definitely getting a housekeeper. I just want to clean up first before she comes.

Answer 1

Ian Walker of the University of Warwick in England came up with a formula a few years ago to help assess the monetary value of your time. The formula is based on the assumption that what you make is an indication of how you value an hour of your time because that's what you're willing to sell it for to an employer. Here's Walker's formula (algebra-phobes may want to close their eyes now): The value of your time = [Wage(100-Tax rate)]/Cost of living. And according to ACCRA, which compiles cost-of-living indexes, your cost of living number is 137.3, meaning the cost of living in San Diego is 1.373 times higher than the national average (100). By Walker's formula, the value of your time is $16.44 per hour. If it takes you two hours to do your shirts (time you might value at $32.88) and the laundry service can do it for the same or less, you might conclude it's a worthwhile purchase if you'd rather do something else with your time. (Attached is a partial list.) The formula also assumes the value of your time is constant. He notes the value of his time in summer is probably less than during the school year when he's at his busiest. That should be a top consideration when assessing the value of your time, since time is a finite commodity for all of us, and how we spend it determines our quality of life, Hamermesh said. So you'll have to rank your likes and dislikes and your level of competency at various tasks, in addition to roughly gauging the monetary value of your time to determine if a service is worth your money in exchange for free time.

The time value of money draws from the idea that rational investors prefer to receive money today rather than the same amount of money in the future because of money's potential to grow in value over a given period of time. For example, money deposited into a savings account earns a certain interest rate and is therefore said to be compounding in value.

KEY TAKEAWAYS

• Time value of money is based on the idea that people would rather have money today than in the future.
• Given that money can earn compound interest, it is more valuable in the present rather than the future.
• The formula for computing time value of money considers the payment now, the future value, the interest rate, and the time frame.
• The number of compounding periods during each time frame is an important determinant in the time value of money formula as well.