A Canadian's random thoughts on personal finance

Jun 2, 2010

Don't overestimate the value of your leisure time

Amber Bellaire has written a blog post that justifies spending money on maid services. This is a convenient post in that offers one-stop shopping for a variety of naive fallacies used in such arguments.

The logic goes like this:
Combined, their weekly before-tax income is about $2,000. At this rate, each partner is making about $24 an hour.

If both partners together spend six hours every other Saturday cleaning, that’s 12 hours out of their combined free time being spent on cleaning every two weeks. Multiply that by 24 (because each person is worth $24 an hour), and the couple is spending almost $300 worth of their free time hours cleaning biweekly. That’s $600 a month, or $7,200 per year.
The most striking flaw in this reasoning is that their time is not worth $24/hour. It must be worth less than that, of course, or else they would not be so eager to give an hour of time to their employers in exchange $24. Consider: if their employers were to cut their pay to $23.50, would they quit? If their time was worth $24/hour, they should!

This kind of reasoning is really nothing more than elitism practiced by people with well-paying jobs: if I make $24/hour, and you make $12, then my leisure time is worth twice as much to me as yours is to you. If that's the case, we should all be working around the clock to make sure Bill Gates gets all the leisure time he can.

A second important flaw occurs just a few paragraphs later:
For four hours of cleaning at $22 an hour, you’d be spending $88 to have your house cleaned by the company – saving you $212 worth of your own hours spent on cleaning (300 – 88 = 212) biweekly. That’s a savings of $424 per month, or $5,088 per year.
Here is the common fallacy that spending money is a form of "saving". Saving money means not spending it. It doesn't mean you've spent less than you could have. It doesn't mean earning yourself something that's "worth" money. Saving money is the opposite of spending money. The only way for the couple in this scenario to save money is to use cheaper cleaning supplies.

The proper way to evaluate a maid service is, of course, to compare the alternatives available, just as in any other purchase decision. Using Ms Bellaire's figure of $88 biweekly, the couple in her example would be spending $2288/year on housecleaning services. Here are a few ways to reason about that amount:
  • Using Ms Bellaire's figure of $24/hour, they would need to work an extra 8 hours overtime per month (or 5.3 hours at time-and-a-half) to pay for the maid service. If they're willing to do that, it may be worthwhile.
  • Using opportunity cost, consider that $2288 buys a pretty nice little vacation every year for two people. If you're willing to give that up, the maid service may be worthwhile.
  • Using investment opportunity cost, consider that $2288 spent on a maid this year could have been invested in stocks, where its real value could be expected to double each decade. If you have three decades until retirement, you've just spent over $18k of retirement money on the maid this year. To put this in perspective, note that amount would be greater than the couple's final RRSP contribution.
  • Using the 4% rule, that amount is equivalent by the income produced by an investment of $57,200. If you could imagine saving up that amount, and then cheerfully handing it over to someone for a lifetime of maid service, then it's worthwhile. (The trouble with this argument is that I don't think it will be very convincing to anyone who doesn't happen to have $57k sitting around, because it's too easy to spend imaginary money.)
If you can look at all four of these lines of reasoning and still feel comfortable spending that money on a maid, then go for it.


Michael James said...

Although I've never written on the subject, I've thought quite a bit about the subject of how much I value my time. Your analysis is certainly much better than the one you criticize.

There are many factors that enter into whether to pay for a service or do it yourself. Your rate of pay, your competence at the task compared to the competence of the person you pay to do it, how much you dislike the task, etc.

As a very rough rule of thumb, I value my time at my income spread over all my waking hours. So, someone who makes $24/hour for 7.5 hours per day is only making $11.25/hour over 16 hours, and perhaps $9 or so per hour after income taxes. This approach has its limitations, but I find it a much better measure of how much I should be willing to pay to save time.

Patrick said...

Hi Michael,

I'm planning to talk about this more in a future post. The problem is that leisure time has no fixed monetary value. Suppose you lost all but one hour per week of your leisure time; how much would that hour be worth? As you add more hours, the marginal value decreases. The slope of this curve is so extremely steep that I don't think there's any point trying to come up with one fixed number.

Michael James said...

I agree that there are major problems with coming up with one fixed number. This includes the fact that it becomes increasingly inaccurate as large amounts of time are consumed or freed up. So, I view my number as a sort of marginal value that applies for only a few hours per week deviation from my current level of free time. I use it mainly as a starting point to think about a choice rather than a hard and fast rule.

Another point is that I don't actually use my full income as input to computing this number. I have no intention of filling my life with work until I die. I think of spreading my income-earning years over my entire life.

Patrick said...

Hi Michael,

I wonder if the question "would I work enough overtime to pay for this?" might do the trick. Perhaps that would focus one on the actual effort involved in earning money, rather than numerical abstractions.

Michael James said...

I think the overtime question would work for some people. I am salaried and cannot get paid more for working overtime. If I put in a significantly larger effort doing things I don't like doing (like management) I could get paid more, but I'm not going to do that. So, I prefer to estimate how much income I'll get over the rest of my lifetime (including pay, investment returns, CPP, etc.) and smear it out over an estimate of the remaining working hours of my life. This gives me a starting point for whether it is worth paying someone else to do a job for me.

Michael James said...

Oops. Toward the end of my last comment, I meant "waking hours of my life".

Patrick said...

@Michael: I've always thought blogs should give people, say, 5 minutes to edit their posts. Kind of like buyer's remorse for blogs.

I am also salaried, but I treat the question of overtime as hypothetical. It just gives me a gut feel for the value of my money. It's not hard to imagine giving up time with my family to work overtime, and when I do so, I quickly realize I'd need more than my usual hourly rate to agree to that.

Strangely, the opposite is also true: when I imagine giving up my usual hourly rate to get more free time, I realize I wouldn't do that either. That means I gladly work that 40th hour per week to get an hour's pay, but I would not work the 41st hour to get the same pay. This is why I have trouble believing my time has any fixed monetary value.

Stuart R. Crawford said...

The one thing I didn't see in this blog post was a mention to the ROTI factor. What is the Return on time invested? If you can get $100 back for each so-called $24 hour, isn't that a great idea?

Stuart Crawford
Calgary, Alberta
Calgary Search Engine Optimization Specialist

Patrick said...

@Stuart: Absolutely, I think anyone earning $24/hour would jump at the chance to earn $100/hour, but I'm not sure I follow your reasoning. Did you have a particular scenario in mind?