Many of us are big proponents of living within one’s means, and saving for retirement and other life needs. In order to do that, we often try to save as much as feasible based on our current income level. This makes sense, and is a cornerstone of growing one’s wealth.
To this end, saving money almost becomes a sport to some people. Check that – it IS a sport to many, who spend big chunks of time looking for deals, cutting coupons, reading about ways to save money, and so on. Some people, like me, even write about ways to save money! As any regular reader knows from the Squirreling Gone Wild series, I personally enjoy observing and hearing about people who go to extremes to save a few bucks. And yes, sometimes I take part in the fun too. I truly enjoy saving, both in terms of finding ways to cut costs and in getting deals. Some people get so caught up in squirreling away money any which way they can, that they cross lines of fairness, which clearly isn’t cool.
When saving becomes an obsession, it’s easy to forget about making money. I shared my thoughts about this in the post Saving is Great, but Don’t Forget to Make Money Too. When consumed by saving, income growth – or worse, income preservation – is often forgotten.
I thought about his some more, and am considering the ROI of time invested in both saving and income growth. Here’s my question:
Is it more productive in the long run to increase time on income preservation and growth, while reducing time spent on saving?
To some degree, we’ve explored part of this topic in a few prior posts. Clearly, spending time on saving is important. It’s just that when we take it a step further and analyze it, there are diminishing returns to our time.
Let’s take an example of a random person – let’s call her Jane – who makes $4,000 per month after taxes. Jane’s expenses are $3,600 per month, netting her $400 in savings per month. Jane is saving 10% of her income. Let’s also assume that she does so without giving it much thought.
Next, let’s say Jane decides that she wants to look for ways to save more. Let’s say she starts looking for coupons, spending an hour a week searching and cutting/printing. Let’s say she goes an hour out of her way each week to go to different places that can save her money on regular purchases – groceries, gas, cleaners, etc. How about we also assume that Jane spends another 2 hours per week online reading about ways to save money, talking about shopping, or thinking about saving on good deals. Maybe another hour tracking her spending in great detail, recording all transactions and filing away all receipts. Total weekly time spent focusing on saving is maybe 5 hours, and let’s say that projects to 20 hours per month.
How much can she save? Well, it depends on her situation, but let’s say that she can cut her expenses from $3,600 per month to $3200. That’s $400 in savings for 20 hours of her time. $20 per hour isn’t bad!
After a while, however, Jane can only cut so far. The next month, if she spends 20 hours of time focused on savings-related activities, how much could she save? She already took care of the low-hanging fruit, so now it takes more work. Maybe now she’s identified the opportunity to save another $200. So, based on 20 hours, that comes out to $10 per hour. The third month maybe she’ll cut another $100 from her expenses, making her payoff $5 per hour.
Eventually, there’s only she could save, and her ROI in terms of time starts to diminish.
What about time spent on income?
First off, if Jane is working, she’s already spending the better part of the day generating income. Hopefully, she’s positioning herself to continue earning income and maybe make more. But what if she invested some of that time on income – let’s say 12 out of those 20 hours?
She could spend those 12 hours researching different side businesses. Or, she could spend time pursuing an advanced degree part-time. Perhaps she could learn about investments. Maybe should devote that extra time to her current job, and really make herself invaluable or even promotable. Or she could spend some of the time working, and the rest networking, meeting other professionals and learning about opportunities.
What would her ROI on that time be?
It might be low. It might be wasted time. Or, it might be well worth it and pay massive dividends down the road. If she really invests her time right, she could work toward growing that income much higher. Who knows, maybe she could double her income, increasing it $50,000 to $100,000? Or more?
If she spent all her time obsessed with saving, she couldn’t gain $50,000 back in reduced expenses. There’s a limit to what can be gained that way.
By investing some time in income growth, there ROI could range from zero on the low end, to an upside that could be quite high.
If in the end, saving or growing income is all about having more money. Thus, it pays to think about ROI on time, and consider balancing time between saving and income growth. There’s a combination there that’s right for each of us, based on our own individual needs.
And the portion of wealth creation that’s spent on saving…if it’s an exhilarating sport to you, enjoy it! I know I do:)