Inevitably, a New Year leads to time spent reflecting on one’s goals and happiness with life. Many people make New Year’s resolutions that are related to money, often because their financial situation is a source of great unhappiness. I’m not exactly thrilled with my financial situation, but I had already gone through the process of establishing my financial goals last summer. That was when I graduated from a full-time MBA program with zero savings and about $28,000 in debt in the form of a home equity line of credit. I was lucky enough to have a full scholarship that covered the actual cost of my education, but the HELOC was necessary for ordinary living expenses. And because I was not yet as disciplined in my spending as I am now, the HELOC was also spent on some less than necessary expenses.
After graduating in a completely lousy economy, I took a good hard look at my financial situation and was none too pleased with what I saw. I established two financial goals for myself to achieve over two years:
- Build up an 8-month emergency savings of $24,000
- Pay off the $28,000 in HELOC debt I accumulated while in school
These goals are so basic that I really have no need (or means) to pursue other financial goals at this time. So for me, the dawn of 2010 was not a time for new money-related resolutions. Instead, I decided to get a better understanding of the value of my time.
I’ve heard people refer to money as something you trade your life energy for. I think this is a really great concept. I enjoy my work, but there are about a million things I’d rather be doing than working. I am not one of those people who will one day delay retirement because I don’t know what I would do to fill my time. As far as I’m concerned, retirement can’t come soon enough.
This made me curious about how much I had to work to have extra spending money for non-essential items I like to buy. In other words, after savings and necessities are covered, what is left and how much of this discretionary money do I earn per hour worked?
What did I discover? My time isn’t worth nearly as much as I thought, and the things I buy for fun, vanity, or entertainment cost me a LOT of time at work.
Here’s how I calculated the hourly rate I earn to spend on non-necessities:
- I started with my take home pay. This is the amount left after taxes, contributions to my 401(k) and regular savings, deposit to my Health Savings Account (HSA), and health insurance premium payment. If you do this calculation for yourself and don’t have an automatic direct deposit to savings, be sure to subtract the amount you contribute to savings from your take home pay.
- I then subtracted my fixed monthly payments. These are things like rent, phone service, and my monthly payment to the infamous HELOC.
- Next, I subtracted my average monthly expenditure on necessities. Necessities include items like groceries, gas for the car, and utilities.
- I took what was left and divided it by the average number of hours I work in a month. I’ve been good about working 40 hours per week and not putting in much extra time, so I calculated that a typical month for me has 176 hours (I erred on the high side). If you are someone who works more or less hours, you should take this into consideration when doing this calculation.
This calculation will tell you how much “spending money” you have each month to spend on non-essential items. It will also tell you how much spending money you earn for each hour you work.
In my case, I earn $6.45 of spending money for every hour worked. Considering that I am currently saving fully one third of my income (see goal #1 above), this is actually not bad. I have a low cost of living and no car payment. Even so, I was surprised that the “extra” money I have per hour worked is only $6.45.
What does this mean in terms of the cost of things I buy? Below are some examples of how many hours I have to work to afford the non-essential items I enjoy consuming:
|Dinner at my local sushi place||$20||3.1|
|New pair of shoes||$120||18.6|
|Haircut and color||$150||23.3|
|Movie ticket, popcorn, and soda||$17||2.6|
|E-Book for my Kindle||$10||1.6|
|A domestic vacation of 4 – 5 days||$700||108.6|
|Christmas presents for friends & family||$500||77.6|
|Monthly gym membership||$37||5.7|
This exercise gave me a new perspective on some things. First of all, it made me feel very fortunate to have a fairly well paying job in a terrible economy when so many people are unemployed or underemployed. A lot of people have jobs that pay them a gross income of little more than $6.45 per hour, and this money has to cover not just “extras” like I’ve listed above, but all of their necessities as well. I am very lucky to have the option of spending some of my money on pricey haircuts and dinners in restaurants.
Secondly, this exercise made me appreciate how much of my time I have to sacrifice to buy the things I enjoy. In some cases, I think it’s well worth it. A $10 e-book that I can “earn” in just over an hour and a half of work will bring me dozens of hours of entertainment. On the other hand, I’m not sure that the fabulous pair of shoes that goes with exactly one outfit in my closet is worth the 18+ hours (more than two days!) I would need to work to afford them.
In 2010, I am going to focus on the number 6.45. Whenever I’m debating whether or not to buy something I want (but don’t really need), I’m going to divide the cost by $6.45 and think of the purchase in terms of hours worked. I suspect that I will often find that it is much easier to put the shoes down and walk away when I think of them as time spent at work.