Saving money can give us joy if we want to increase our freedom. But, instead of obsessing about a specific monetary figure, we should how much Savings we have when measured in Time.
- Time or Money
- Savings measured in Time
- Reducing expenses increases our savings in a linear way
- Growing our revenue increases our savings exponentially
Having money is fantastic. It can be used in many ways. Money offers us three of the most important things in life: security, freedom and a better lifestyle. Because it is so versatile, money can also be measured in terms of time.
Time, along with health, is the most precious resource humans have. It is also the scarcest. We can always make more money, but that does not work the same way with time. The good news is that money can be used to buy time.
Time or Money
If you had to choose between being 25 years old and broke, or 90 years old and a billionaire, what would you prefer? I would go for the former. At the end of the day, we all want money in our lives, but we also want to be able to enjoy it.
The previous comparison was very extreme but can help us put things in perspective. Fortunately, not everything is black or white in this life. There are many shades of grays. That means we have many ways to structure our life and plan how to accomplish our goals.
Most of us are willing to make sacrifices in the short term to be in a better position long term. That is the reason why we do many things, such as studying, working, saving, and investing. All these actions have something in common: we give up something today to have something better tomorrow.
Savings measured in Time
We all like to have free time. And by free I do not mean that we must necessarily sit idle by and do nothing. Although if that is what you would like to do, go ahead. By free time I mean that you are free to decide what to do with your time: spend time with your loved ones, play sports, work, start businesses, travel the world, read, learn to surf, learn a new language, or do all those things at the same time.
To find out if you are making enough financial progress today to have more free time in the future, you can analyze how much time you have saved. And how much time you save every month and every year. We can use two different methodologies.
The first methodology is about dividing your current wealth by your monthly expenses. They can be your current monthly expenses or the expenses you would have if you reached your desired lifestyle. This will tell you how many months you have saved up. Or how many years!
The reason why we use the monthly expenses to make this calculation instead of our income, is that what matters is how long we could live on that money.
The second methodology is about comparing the passive income generated by our assets with our monthly expenses, either current or hypothetical. If our passive income exceeds our monthly expenses, congratulations! That means you are financially free already. From a financial perspective, you have saved infinite time.
As a general rule, if your wealth has grown to between 25 and 35 years of annual expenses, it is very likely you have already achieved financial independence.
Next, we will look at two ways we can increase our saved time.
Reducing expenses increases our savings in a linear way
The most immediate way to increase our savings is to reduce our expenses. It sounds simple, and it really is. But that does not mean it is easy for everyone. If you are saving already, you have made the first steps on your journey to financial independence.
However, if you have not yet developed the habit of saving, you may find it hard to start living below your means. But remember it is a requirements. If you want to save money and time, there is no alternative. You must live below your means to have something left at the end of the month.
But that is not the only thing. Keeping your expenses in check is a necessary step, but not enough.
The problem with saving is that, by itself, it is very limited. You can only save 100% of your income, which is (virtually) impossible. And probably not very pleasant. It is also not the most efficient way to go about it.
Cutting your expenses increases our savings in a linear way. And linear things require a lot of effort and time. Let us see why with an example.
You earn €2,000 a month, of which you spend €1,500 and save €500. If we measure our monthly savings in time, you are saving a month every 3 months. Or 4 months every year.
The following graph shows how many months we can save every year, based on our monthly expenses, if we assume that our monthly income is €2,000 and our desired expenses €1,500:
If we spend €2,000 euros a month, we save nothing and accumulate no time. At the other extreme,if we spend nothing and save €2,000 every month, we would be saving 16 months every year. While saving is important, saving money will only increase our time saved in a linear way.
Growing our revenue increases our savings exponentially
On the contrary, there is no limit when it comes to increasing our income. If we focus our energy on that, we can save a lot more money and time. Hence, our savings can grow exponentially.
Keeping our expenses under control remains essential. After all, if our expenses always grow in line with our income, we will make no progress. But if we manage to make more money and keep our expenses unchanged, our savings will grow much faster.
This second graph shows us how many months we would save every year, depending on our monthly income, and assuming that our monthly expenses are fixed at €1,500.
Because there is no limit to how much we can earn, we can even see how many months we would save if our income was €10,000 a month: 68 months. That is, 68 months every year. As a result, it is working hard on making more money:
It is often said that he who needs less is richer than he who is very wealthy and needs much. To be honest, this is a question of personal perception. However, both of them are limited by the time they have in their lives.
As a result, we could draw the conclusion that wealth is not only a question of money, but also time.
I encourage you to pay attention to both your income and your expenses. There is probably room for improvement in both, and those improvements are worth pursuing. But remember that growing your income will yield higher returns in the long run.
The third way to accumulate more time is by investing our money. For this reason, I recommend you check out the following section:
Learn How To Invest
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