What is It Really Going to Cost?
As usual, I’m working with a family that’s spending a ton of money on STUFF. Most people do this unconsciously, never giving a thought to how much of their life’s energy is going into the purchase. This is a concept I learned from the book, Your Money or Your Life. (Another one of those books that changed my life. I am so grateful to Gutenberg.) I’ve put it to work personally, and I’ve put it to work with my fams, and it has a big impact
Let’s say you decide you just HAVE to have the newest cell phone that spits nickels and whistles Dixie while calculating how far you haven’t walked this week. It runs for $379.99.
Now let’s say you have a great job. You earn $75,000 a year GROSS, which means you take home approximately $50,000 NET. That translates into a net hourly income (assuming 50 weeks and 40/hrs a week for work) of $25. Yup. You make a whopping 25 bucks an hour after taxes.
But that’s NOT your disposable income. You have to cover stuff like rent, car payments, debt repayment (for the last phone and all those dinners out), savings, and the like. Okay, let’s say your Essential Expenses – rent, food, and all the other things you MUST pay to keep body and soul together – add up to $3,300 a month. That’s breaks down to $19.80 per hour. (3300 x 12 / 50 / 40)
Are you still with me?
So your actual disposable income is your net monthly income of $25 less your Essential Expenses of $19.80, which leaves a whopping $5.20 an hour.
Now here comes the really PAINFUL part.
Take whatever you’re thinking of buying, and divide the cost by your Hourly Disposable Income (HDI) to see how much of your life’s energy you have to swap for that handy-dandy new device. In the case of that Phat Phone, you’d have to work for about 73 hours. Yup. Almost two weeks.
Hmmm.
If you really want the phone, and you have the money set aside to pay the bill right off the bat, you should buy it. But you should also do this exercise since its useful for putting things in perspective.
If you really want the phone and you’re going to put it on credit, then you have to add in the interest you’ll pay to come up with the right number of hours of your life you’ll be swapping for it.
Want to work out your Hourly disposable income?
- Take your net pay and divide it by the number of hours you work a year. I find dividing by 40 (for hours worked in a week) and then by 50 (for weeks worked in a year) works great. This is your Net Hourly Income.
- Then calculate your monthly Essential Expenses. Multiply that number by 12 and divide it by 40 and then by 50.
- Subtract your Essential Expenses hourly cost from your Net Hourly Income. You’re left with your HDI.
Now, whenever your trying to decide if a purchase is really worth it, divide your purchase price by your HDI to see how many hours you’ll have to work to pay for the item.
Of course, you’d be a maniac to do this every time you’re considering buying something. Com’on. You don’t want to be OBSESSIVE or anything. But if you even give a second’s thought to the question, “Should I?” when it comes to buying something, do this calculation. Then stick the money you would have spent in your savings account. You were going to blow it on STUFF anyway, so you can consider it SPENT.
July 7th, 2008 at 9:47 am
My sister and I did the simple version of this exercise a couple of years ago when she starting working for an hourly wage. She said I took the joy out of her spending and she can’t pick up anything without doing the quick math: $100 purchase/$10 per hour (gross) = minimum 10 hours worked before taxes. We probably need to have a refresher using Gail’s method.
Also, the little phone in Ontario would cost 10 hours of labour just to pay the taxes alone.
July 7th, 2008 at 10:40 am
Good morning Gail,
Love the article and it puts everything into perspective, but I would love to know the author of the book “Your money or your life”.
Thanks for making finances easy to understand.
Tony
July 7th, 2008 at 10:50 am
How funny! I’m just now reading “Your Money or Your Life”…I’ve just started it, but I think it might be one of those books I actually need to buy for reference!
@Tony: the author is Gutenberg.
July 7th, 2008 at 11:04 am
I can’t find this title by Gutenberg only Joe Dominguez and Vicki Robin. Is this a different book?
July 7th, 2008 at 11:10 am
Oh! My apologies - Gutenberg is the printing press inventor. Yes, it’s Joe Dominguez and Vicki Robin. It’s from the mid-90’s, so a little bit dated, but lots of good advice and really focuses on changing your mindset about money, how it’s used, how you use it, etc.
July 7th, 2008 at 11:19 am
I am used to doing a similar calculation when I want to buy something (vs needs to buy something)…. yours is was more brutal though!
Gail, I hope you don’t mind that I copied and pasted this one into an email and sent it to my sister…. the queen of impulse shopping…. (full credit to you and a link to your blog, of course)
July 7th, 2008 at 12:24 pm
Perfect timing. For the past 4 days I’ve been trying to decide whether or not I should purchase a non-essential $200 “want” item. The husband is fine with me buying it as long as I would use it. It would require a significant amount of my time (90 min/week) in order to make good use out of it. This blog has made my decision for me. Not only is it the money, but its also the cost of my time. When you have 2 young kids (1 and 3 year old), time is as valuable as money. Thanks Gail.
July 7th, 2008 at 12:51 pm
Sheer brilliance and I am sure this is where people go wrong! They think they earn 100,000 a year, but actually once you minus your cost of living its more likely you have less than 5k a year to play with! All of a sudden spending $300 seems unrealistic!
July 7th, 2008 at 1:59 pm
I love Your Money or Your Life! A great book. I was wondering when you were going to mention it on this blog. Your calculation is actually a bit different than the one they use in the book, but just as effective! Once again, being conscious of where you’re spending and whether it’s worth it in terms of your life energy is the key.
July 7th, 2008 at 3:39 pm
Great post Gail! Also I think it would hammer home how much your daily cost of living is. You may also want to think about is that house with the white picket fence really worth my freedom? Personally my husband and I have chosen to live in a smaller condo townhouse and people wonder how we are able to travel so much. Next year we are off to Europe. I love my house and it’s plenty big for both of us and a small family in the future.
July 7th, 2008 at 6:36 pm
I read “Your Money or Your Life” a few years ago and it was life-changing for me. What’s especially cool about it is that the authors used the proceeds to start “The New Roadmap Foundation.” Both continued to live on very very small amounts of money ($6,000 at first, I believe). Joe Dominguez died of cancer a number of years ago, but Vicki Robin is still going strong trying to educate people to change their relationships with money.
It is because of this book that I expect to reach “financial independence” at age 35 - a little under three years from now
July 8th, 2008 at 9:40 am
Thanks Annie for the heads up, I’ll have to get a copy.
July 8th, 2008 at 10:59 am
@ Tony: Joe Dominguez and Vicki Robin are the authors! I’m on Chapter Two right now and learning a LOT. Good luck!
July 8th, 2008 at 6:28 pm
I just reserved it from the library! Thanks Gail.
July 22nd, 2008 at 11:04 pm
This is a GREAT post! The Hourly Disposable Income exercise really puts things in perspective. Thanks!