Here’s How Much 1 Hour of Your Time Is Worth as an Entrepreneur
If I make $50 an hour, it makes perfect sense to hire someone to cut my grass for $15. Right?
One key premise in Tim Ferriss’s bestselling book The 4-Hour Workweek is that entrepreneurs should outsource tasks they can pay someone else to do. That is, if it’s less than what they earn. Outsourcing makes sense—unless, as a friend of mine once did, you outsource yourself out of business.
He started an engineering consulting business and set a $95-per-hour rate. Then he decided that anything he could hire someone to do for less than $35 an hour (he thought he was adding a dash of practicality to the equation) made good business sense. And it did.
Since his time was “worth” $95 an hour, why would he spend time performing tasks he could pay someone else to do for much less?
Except he didn’t generate enough business to fill his time, which meant he couldn’t replace “cheap” work with “expensive” work. And that meant he traded $35-per-hour work for $0-per-hour work.
And, eventually, he outsourced himself out of business.
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What is one hour of your time really worth as a business owner?
While his mistake seems obvious, it raises a common problem for entrepreneurs: It’s hard to know what your time is really worth.
Calculating your hourly rate will help you not only in terms of figuring out what to outsource, but how you price projects, how you determine profitability, in short, how you run your business.
So let’s calculate what one hour of your time is worth.
Step 1: Determine how much time you spend working
This might sound easy, but it’s not. “Work” time encompasses all sorts of work-related activities. As a small business owner, you are your business, which means you spend a lot more time working than you might imagine.
With that in mind, for the next week, track:
- Time you spend at work even if you’re not actually working, including travel
- Your commute
- Time you spend working at home
- Time you spend working when you’re theoretically not working (like answering emails at a restaurant)
If you’re curious, here’s what a typical week looks like for me. (Keep in mind I almost always work at least a few hours most Saturdays and Sundays.)
- Time at work: 47
- Commute: 0 (Never underestimate the benefit of working from home)
- Time working from home: 10 (Since I work from home, we’ll call this “off-hours” work)
- Time spent working when theoretically not working: 1
Total: 58. Sound like a lot? It is—but then again, I love what I do.
Chances are that, like me, you’ll find that what you always assumed was a 40-hour work week is closer to a 50- or 60-hour work week.
Then multiply your result by 52. (Why not, say, 49 weeks to account for 3 weeks of vacation? Because in all likelihood you still work at least some of the time you’re on vacation. And because if you’re a service provider and can’t generate revenue while on vacation, that time is a cost of doing business.)
So: If you determined you worked 50 hours, that means you work 2,600 hours per year.
Step Two: Calculate your actual hourly rate
This should be fairly easy.
- Check your W-2 for your take-home pay. Or look at your net revenue from a specific time period.
- Make sure you subtract business expenses that haven’t been accounted for and that you pay for as the owner. This list of tax deductions is a helpful place to start.
The goal is to roughly determine how much money goes into your pocket at the end of the day.
Let’s say your take-home pay was $70,000 this year. Divide that by the 2,600 hours you spent working.
Take-home pay / # of hours spent working in a year = Price of an hour of your time
An hour of your time is worth $26.92 per hour.
Here’s where it gets interesting
If you were my friend, you’d of course be shocked: To him, an hour of his time was literally worth $95 per hour. That’s what he charged. To find out that same hour is only worth one-third that amount after taxes and other expenses… Well, eek.
But that’s always the case. Every business has expenses.
And more importantly, every entrepreneur spends hours working “on” the business that don’t generate revenue.
- Getting leads
- Creating proposals
- Taking care of admin tasks
- Hiring and managing employees
The list of tasks that don’t generate revenue is endless. Many entrepreneurs find they actually spend less than half their time actually generating revenue.
While your time may be “worth” $95 an hour, that is almost never likely to be what you actually make.
So what should you do with that knowledge?
How to use your hourly rate to make more money
1. Be smarter about the work you accept—and how you price products and services
Say your rate is $95 per hour and a project will generate $65 per hour. You should turn it down, right?
Not if you have the time available to perform that work. $65 per hour is a lot better than $0 per hour.
Granted, cutting prices can be a slippery slope. But not earning enough to stay in business is a far slipperier slope.
Once you determine what your time is actually worth, don’t be afraid to work for less than you assumed your time is worth.
(Granted the math is a little more complicated if you sell services that aren’t priced by the hour, but with a little effort you can estimate your hourly cost.)
And you can always raise prices as your business grows—and at some point, when you have more work than you can handle, you can charge full-rate prices.
2. Outsource wisely
It makes perfect sense to outsource some tasks. Even though I’m my only employee, I outsource payroll by using an online payroll provider. Could I learn to do it myself? Probably, but the risk of incorrect reporting, of incorrect withholding, of getting retirement plan deductions wrong… those are risks I’m unwilling to take.
Your business may involve certain tasks that require specialized knowledge and skills. Hazardous waste compliance. Software development. Accounting. Some tasks are too important—and too specialized—to perform yourself.
But in other cases, your goal should be to make sure you can fill the time you save by outsourcing with work that pays more than what you spend on outsourcing.
Otherwise the money you spend just gives you more free time.
- If you determine your time is worth $26.92 per hour and you can hire someone to cut your grass for $15 an hour, is that still a good deal?
- Only if you can actually get paid $26.92 an hour while someone else cuts your grass.
Of course, hiring someone to cut your grass so you have more free time may be a great decision. But don’t fool yourself into thinking you’re making a smart financial decision.
3. Ruthlessly cut expenses
If you’re like most entrepreneurs, over time you’ve started to spend money on things you don’t use or don’t need. Maintenance contracts that sounded wise. Perks your employees don’t care about. Office space for employees who would prefer to work remotely.
Take a moment and cut one expense. Just one. A subscription. A service plan. A recurring charge. You’ll soon find that you’ll save more than just the cost; you’ll also save the time involved in doing or maintaining or consuming whatever that expense represents.
Then do the same thing tomorrow. And the next day. Keep peeling the expense onion. By reducing expenses, you’ll automatically increase what an hour of your time is worth.
And most importantly…
4. Work hard to maximize revenue-generating hours
You should always be maximizing the time you spend on activities that generate revenue.
Your goal is to increase the value of an hour of your time. While you could try raising prices, that’s often not feasible. But what you can do is streamline your workday and spend more time on activities that generate revenue—and less time on things that don’t.
Here’s a simple approach: When you land a new customer, don’t automatically plan to have your team work more hours for them. Look for ways to increase your efficiency on non-revenue generating tasks so your team can still work the same number of total hours.
- Prune your to-do list.
- Give a trusted employee greater decision-making latitude.
- Spend less time making social media connections that are unlikely to become actual customers.
Adding just one hour a day of revenue generation will dramatically increase what your time is really worth.
But don’t stop there. The only way to come close to earning what you feel your time is really worth is to spend as much of your time as possible actually doing what earns money.