What Is the Time Value of Money?

We most often think of money in terms of its monetary value. And this obviously makes sense in a lot of ways. Unfortunately, however, monetary value does not capture the whole picture and can lead to bad decisions and worse outcomes. That is why, especially as physicians, we need to consider the time value of money.

So, what is the time value of money?

They say money can buy anything but time. And this is true at the very end of your life. But while you’re alive, that’s not really true at all. Money absolutely buys you time. That’s exactly what financial freedom is. It is you buying back all of your remaining time to spend exactly as you please.

It seems obvious reading it like this. But truly understanding it is so powerful. This realization completely changed my mindset and outlook on life. That’s a big statement, but it’s true. I never really thought I’d be able to live life completely on my terms until I was older and retired. Financial freedom completely disproves that myth.

In this sense, the time value of money may be even more important than its actual monetary value. And we need to be using the time value of money to assess the decisions we make much more regularly than we actually do.

So how can we do this? Well, we can calculate the time value of money in two ways.

1. The Hourly Wage Method

This way is pretty simple and fits into our usual conception of money as holding monetary value.

To gauge the time value of money in this way, simply figure out what your hourly wage is as a physician. To do this:

• Figure out your average monthly post-tax income over the past year
• Divide that number by the average number of hours you worked each month over the past year
• I wouldn’t use side gig income here and would stick to just your physician income

There you go. That is your hourly wage. It doesn’t need to be totally spot on — you just want a good average number.

Now you have the monetary value of 1 hour of your time in a very concrete and immediate form.

One important note: When you make this calculation, you may be happy with your hourly wage or you may feel you are very underpaid. If you feel underpaid, use strategies like these to increase your compensation.

2. The ‘Time Delayed’ Method

This method is a bit different and more outside of our usual concepts of money. But stick with me…

Let’s say you use my FIRE calculator and figure out that you want a $4.5 million nest egg to retire. You plan to retire in 25 years. So, using the same calculator, you figure out that you need to save $100,000 annually. This assumes you have no savings to start with and make an annual 5% return. Doing this, you will end up with $4.7 million at the time of your proposed retirement, therefore meeting your goals.

Essentially, this means that $100,000 is equal to 1 year of savings. The time value of that $100,000 is roughly 365 days. That is, 365 days that you need to work and save to balance your FIRE equation.

Inversely, 365 days of your time is worth roughly $100,000 using this method.

Now, I know this calculation is not perfect — and it’s not meant to be. There are tons of other variables. But the point is to give you a new frame of reference about how your money and time interact. More precisely, you want to know whether some amount of money is worth your time or not.

OK, so now we have two methods to calculate the time value of money. But what do we do with these calculations in our lives as physicians? And how can they help us make better decisions — both financially and otherwise?

The best way to illustrate this is through examples.

Scenario #1

You are an internal medicine doctor making $250,000 post-tax annually for 40 hours/week of work. An hour of your time is thus worth roughly $120 ($250,000/(40 hours per week X 52 weeks)).

A moonlighting opportunity comes up and offers $200/hour. This may be an opportunity worth considering. Now, you add in all the other variables. Working one extra moonlighting shift may therefore be worthwhile as long as it doesn’t diminish from other areas of your life like family, friends, and personal well-being.

Another moonlighting opportunity offering $100/hour would be a non-starter.

The same goes for any side gig opportunity that offers you less money per hour than this!

Scenario #2

You are a pediatrician making $175,000 post-tax annually, working an average of 40 hours each week. You seek to have a $2 million nest egg when you retire in 25 years. And you determine this because you estimate $7,000 in monthly expenses in retirement (calculated using this method). In this case, $7,000 buys roughly a month of your time.

You are trying to figure out if real estate investing is worthwhile for you.

After research and education, you estimate you can make an annual 14% cash-on-cash return from investing in duplexes in your local market. You would need a roughly $50,000 initial investment (down payment and closing costs) for each property. Thus, your annual cash flow from each property is $7,000. This ignores the other four important ways that cash flowing rental properties make you money.

In this scenario, every property you buy according to your criteria buys you 1 month of your time over the span of 1 year.

You therefore plan to buy one such property every year for 12 years. After 12 years, you will have bought 1 year of your time via annual cash flow from rent. And the best news is that this cash flow continues year after year. So, you actually just bought your financial freedom!

Scenario #3

Let’s say you are the doctor in the above example used in calculation method #2. Your goal is to save $100,000 annually to reach your goal nest egg in time.

Now, let’s say that you face a choice. You can:

• Buy a Tesla for $50,000; or
• Save and invest that money

Essentially, that $50,000 is equal to half a year of savings ($50,000/$100,000 annual savings goal). The time value of that Tesla/$50,000 is roughly 183 days. That is, 183 days more that you need to work and save to rebalance your FIRE equation.

Is it worth it to you? For some, the answer is yes. For others, the answer is no. But you need to ask the right question to make the right decision. And most of the time we don’t!

The Importance of the Time Value of Money

I hope these scenarios illustrate just how powerful the time value of money is and how it can help guide you through some impactful decisions!

The goal in life is to live in a manner aligned with our goals and values. To do this however, we need accurate representations and measurements for our goals and values.

Unfortunately, the monetary value of money only tells part of the story. And the less important part in my opinion. Remember, money is just a tool for the good it can create. And financial freedom can create a whole lot of good for you and your loved ones.

Disclaimer: The author is not an attorney, accountant, or financial advisor. His expertise is in the field of medicine. Any information in this op-ed and its links should not be considered personalized financial advice.

Jordan Frey, MD, is a plastic surgeon at Erie County Medical Center in Buffalo, New York, and founder of The Prudent Plastic Surgeon.