I realized awhile back that when I think of buying something, my internal dialog helps me out by automatically thinking of all the reasons why I want it, instead of helping me realize why I don’t need it. And probably not by coincidence, the same thought patterns apply to keeping and storing stuff as well; automatically thinking of reasons why I might want to keep it instead of remembering all the months (a lot of times years) I haven’t actually needed it. These two combined make a nice little pattern in my life I like to call paycheck to paycheck crap-hoarding.
One of the reasons I buy stuff that I really want but don’t really need (besides the always fun and addictive dopamine fix) is that I often look at an item and think “why not, it’s only $__.00″. So, one day when I was listening to and trying to change my internal dialog, I started coming up with reasons for why I don’t need the shiny new tech-gadget in front of me.
I realized it would be helpful to think about how long it took me to earn the cash I’m about to give away, and it dawned on me that just dividing the purchase price into my hourly rate isn’t very accurate because it doesn’t account for the third of taxes that are taken out. In other words, my net hourly rate (or my actual take-home pay) is actually about two thirds of what my gross hourly rate is (my taxable salary amount).
This got me thinking about what else I shouldn’t count towards the time it takes to earn the cost of a purchase. If I subtract my monthly mandatory bills and minimum expenses from my monthly take-home pay, I’ll get an amount that’s more reflective of my monthly expendable income… money I can either save and invest for the future, or blow on impulse buys and live paycheck to paycheck.
True Hourly Wage
If I then take that amount (my net hourly wage minus bills & expenses) and divide it by the number of hours worked in a month (usually 160), I’ll get an hourly rate that represents the amount of time it takes to earn my spare cash. Let’s call that expendable income your “true hourly wage”. To figure out how many hours it takes for me to earn the expendable income I spend on non-essential purchases, I do the following calculation:
Let’s say Bob’s hourly rate is $25/hour. This would make his take-home pay after taxes and deductions around $1300 every two weeks, or $2600 a month. The only thing left to do is figure out how much he spends on bills and minimum expenses every month. (I use the free and awesomely easy website Mint.com to automatically track and categorize all my bank transactions, and here is a great website to calculate salary and hourly rates after deductions.)
Now let’s say that Bob’s monthly bills and minimum expenses are around $1800/month, then here’s what we get:
Hours worked = 160 hours/month
Bi-weekly take home pay X 2 = $2600/month
Bills = $1500/month
Minimum expenses (e.g. gas, food, etc.) = $300/month
$2600 pay – $1500 bills – $300 expenses = $800 expendable income per month
$800 divided by 160 hours = $5/hour
So, I recently ordered a pizza instead of cooking dinner ($25), bought some new clothes ($50), and hooked myself up with a nice new pocket camera ($200). This formula shows me that if I made $25 an hour, then I just worked roughly five hours today for a pizza, 10 hours for those clothes, and a full work week for that camera. This also means that the $2000 engine rebuild I need for my car sometime this year would take 400 hours, or two and a half months of expendable income to pay for it! wow.
Another way to see this idea in practice:
- Hourly wage: $25/hour
- Hourly wage after taxes: $16.25/hour
- Hourly wage after taxes & bills/expenses: $5.00/hour
- Hourly wage after taxes, bill/expenses, and also subtracting monthly savings and investments (e.g emergency savings, down payment on a house, 401k, Roth IRA, etc.) … : $2/hour
However, the good news about this is that once I pay off some debt and lower my monthly bills, my “true” hourly wage can double or triple without ever getting a true pay raise: Hourly wage after taxes with bill/expenses reduced by half: $10.6/hour
So the question of the day is this, do I really want to work all day long just to pay for a pizza?
Links:
Mint.com
PaycheckCity.com
My financial spreadsheet
The Financial Wisdom of Fight Club
