Beyond “Real Hourly Wage”: How Much Time Does Stuff Actually Cost?
Published on - October 20th, 2008 (by J.D. Roth) In my last post, I explained how to compute your real hourly wage, a notion popularized by the book Your Money or Your Life. Authors Joe Dominguez and Vicki Robin encourage readers to calculate their real hourly wage to gain insight into how much time and energy things cost.
To do this, you must subtract your annual work-related expenses from your annual income, and then divide the total by the number of hours you spend on job-related tasks. This sounds complicated, but it’s not:
After you’ve computed your real hourly wage, you can use it to measure how much things cost. An iPod might cost nine hours of work, or a new sweater might cost three. (You don’t even want to consider how much a new car would cost…)
But does it really make sense to look at spending this way? Does this really tell the full story? During our discussion last week about unconventional money tips, BW wrote with a better way to look at spending. He points out that not every dollar can be counted as disposable income:
I don’t like to think about how many hours I worked for an item I want to buy because it makes the item seem too cheap…A better way to think about it is to subtract fixed expenses from pay first.
He’s right. Let’s say your nominal pay rate is $24 per hour. You compute your real hourly wage as recommended by Your Money or Your Life and find that it’s $17.20. But that’s not the end of the story.
From this money, you must pay taxes, purchase housing and transportation, buy food and insurance, and more. If we make the arbitrary assumption that your fixed expenses (including savings) consume 80% of your pay, your actual disposable income would be $3.44 per hour.
This provides a drastic change to the length of time needed to work for a $150 iPod:
| Method | Rate | iPod Cost |
|---|---|---|
| Nominal Wage | $24.00/hour | 6.25 hours |
| Real Wage | $17.20/hour | 8.72 hours |
| After Expenses | $3.44/hour | 43.60 hours |
Using this example, it doesn’t take you just a day to earn an iPod, but an entire week.
Now, I don’t recommend that you walk around evaluating every buying decision based on “real wage after expenses” units. While educational, this is likely to quickly drain the joy from living. (You might run the numbers once and examine some hypothetical scenarios.)
However, I do believe it’s important to be mindful of your spending. Evaluating your purchases based on the time required to pay for them is an excellent way to become more aware of the actual costs for the things you buy.
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JD,
How has this affected your buying decisions?
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Prabu, this has not yet affected my buying decisions. I only learned about this on Thursday. The “real hourly wage” did affect my decisions, however, which I covered in the earlier post.
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I had said this earlier, but I hate thinking about the things I buy as hours spent on stuff. I used to have a bad habit of doing this, and I used to get sick when purchasing things.
J.D. how many hours would your mini cooper cost, do you think?
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Whenever I think I might make a frivolous purchase, I always calculate how many hours of work it would cost me, whether its worth my time… usually its not.
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Another way to think about it is that if you were to borrow money today for the Ipod at zero interest, it would take a week to pay it off assuming no other disposable income purchases.
This approach also strongly illustrates that if you want to change your financial situation, you have to change your fixed costs so they are a lower percentage of income.
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How about this: just save up for things.
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Pat, now you’re just being mean!
Actually, this is one of the reasons I haven’t gone out and bought a Mini yet. I’ve actually begun to think in terms of “hours of work” for buying a car. It’s not a pretty sight. It just gives me additional motivation to keep using the Ford Focus, you know?
On the other hand, replacing the Focus with the Mini would decrease certain expenses, so my actual cost might be less than I think.
I should note that this “hours of work” mentality not only keeps me from buying comics, it also keeps me from buying video games and other frivolous things.
@Patrick
HA!
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*clutches beloved iPod to chest* lol. I can totally see what you’re saying though, and it makes a whole lotta sense!
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This is an equation that has occurred to me many times in the past, but I like that you put it into words and numbers. Let’s see…
I make a nominal $10/hour. My work-related expenses are mostly taken care of by my work, or else are too tiny to count. The exception is payroll taxes, which takes away about 23% of my wages. Therefore, my Real Hourly Wage is about $7.50.
80% is a good estimate of my overhead. Therefore, my After-Expenses Pay is $1.50! Holy crap!
I’ll experiment to find a healthy medium between reminding myself of this fact and trying not to make myself ill whenever I go shopping.
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Something like an iPod is essential to my work and wellbeing. I spend much of my time on the road and podcasts/ audiobooks are a lifesaver. If I average the cost of the iPod over the 2-3 years of listening pleasure/ entertainment. There are so many free podcasts out there. My favorite lately are from NPR’s planetmoney.org.
Maybe the iPod is not so great an example. How about those magazines I buy at 4-6 dollars a pop versus the time worked to buy them?
A confession: A few weeks ago I purchased a new iPod Classic just as the economic ship was going down. Kind of a last fling.
(Hey…By the way I would love a Get Rich Slowly podcast!)
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But a car would be part of my fixed cost. If it isn’t written into my budget then I have no business having a budget. Same thing for a lot of my expenses. In fact the second step of fixed costs doesn’t apply to me because I am budgeted almost to the dollar including all discretionary expenses.
But on the subject of a car, so many people have never done the math for how much car ownership costs on a per mile/per day basis. Over the past few years I have been working hard to decrease the number of miles I put on my car. Most people think of cost of ownership in terms of gas and oil changes. They discount the price of the car itself, but if you buy a car for $20k then trade it in 3 years and 30k miles later for $11k, you spent 30 cents/mile or $3k/year ($8.22/day) JUST TO OWN THE CAR. And that’s a cheap car. With your numbers one would be working about an hour per day for one’s car without even considering any financing costs.
I want to one day teach high school economics and this is one of the exercises I have put into my file to have kids do. It can be an eye opener for some people, especially as you do the math for different vehicles and terms of ownership.
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When I was a young single parent trying to finish my training as a Chartered Accountant (the Canadian version of CPA) I worked out what my after-fixed-expense-wage-per-hour was.
It was less than a dollar per hour (and a Canadian dollar at that!)
I had already known I was broke, it just made me cry to realize HOW broke I was! If ipods had existed, it would have taken me more than six weeks to buy one counting that way. Honestly, it made me wonder why I was working at all when welfare could have paid a better “wage”. Thankfully I didn’t give in, but I came to understand why so many single parents do!
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@ J.D.
Sorry, I didn’t mean to burst your mini-cooper bubble, because I honestly want one too (actually, my fiancee does). A ford focus is a nice car, and with “Sync”, you’d have a good time telling your car what songs to play. Hehe!
As far as things that you could splurge on, like comic books for you, or electronics for me (used to be magic cards..hehe!), its actually a good way of keeping control of how you spend. So I definitely agree with you there. It’s just the large purchases that make me woozy.
By the way, I read your blog religiously. You’ve helped me get a good start in life and if I could sit own with you and have a coffee, it would be on me for sure. Thanks J.D.
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Yes, yes, yes!!! This is one of the best personal finance formulas around and you DEFINITELY have to take account for your fixed expenses before determining your discretionary income per hour.
Understanding this formula will help you see the effect your fixed expenses have on your discretionary income. If you can cut back on your fixed monthly expenses, that’s like having an hourly raise without technically getting one.
It really puts into perspective some of those mid-range purchases. Sometimes we need a nudge one way or the other on a purchasing decision, and this one can help you see the situation in a different light.
The cost of owning a car is one I’ve greatly considered over the last year. My goal for 2008 was to bike commute as much as possible, and while I don’t drive a whole lot, I haven’t been biking as much as I had wished. A LOT of people are focused on gas costs and mileage, sometimes working out the cost of a trip in terms of money per gallon. I always suggest considering wear and tear on the car, depreciation, and maintenance, too. Only looking at the gas expense in terms of a trip is awfully short-sighted, especially when considering alternative means of transportation. An easy number is to just use what IRS allows for business mileage reimbursement. One day I took the purchase price of my car and divided THAT number by the number of miles I had driven it. My car is about 7 years old, and the cost per mile still made me sick to my stomach!!! It was over 30 cents per mile. That wasn’t even considering interest payments, insurance, maintenance, gas or anything else. 30 cents per mile means a trip 10 miles away would cost me $6. BEFORE gas! It sure makes using public transportation sound like an unbelievable deal. The big problem with our car based society is that once you buy into the system and own a car, you’ve spent or agreed to spend a big portion of the costs of owning a car. It’s harder to be convinced to find alternative means of transportation.
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… this peeked my intrest, and I must admit, the figure I came out with is somber. oh my! will definantly keep that in mind from now on.
I really like that you posted this article, couples with the “real hourly wage”. I don’t see it as a scare tactic more as a splash of cold reality to the face (and budget). while I have been working on budgeting, I never actually though how many hours I worked a week for the alotment of “my money” urg.
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Okay…. I run a pretty tight ship on my fixed expense, they come to about $4.83 of each hour. My pretax 401(k)contribution are $.95 which makes my taxes per hour $2.91 (note, if I did not have my 401(k) deuctions this would be $3.13… so I’m saving there as we all know)
That comes to…$8.69 of every $13.61 earned that is spoken for. I’m not counting what’s going toward debt repayment and emergency fund because I’m still playing with those numbers every month, it ranges from 10-30% each month.
My discretionary income is $4.92/hr. I got my iPod for free (it was a gift to my mother from one of her vendors and she didn’t want it) but in this hypothetical it would cost 30.5 hours… almost a week of work.
Another way: When I purchase a latte and a pastry before work, it’s costing me an entire hour(ish) of actual work. UGH
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…and I used to justify my latte purchase on my way to work by saying: “By the time I finish drinking this coffee, I would have already made that money”.
I’d like to think that I am wiser now. I never go to those coffee shops anymore unless I receive a gift card or on vacation. I make my own coffee at home and it even tastes much better than the commercial quality ones.
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The key thing is to make CONSCIOUS decisions about our spending… and this is just one method. Great discussion.
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I love this! Sometimes I think about my purchases like that. I’m less likely to spend if I know it’s going to take me 2 hours to make enough money to pay for it!
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I use my “real hourly wage” (not incl fixed expenses) when I’m looking at a big capital purchase (like fixing the house or buying a car). For discretionary spending I use my “allowance”. We budget in a montly allowance. So while an ipod might be only a few hours of work it probably would be most of my monthly allowance.
(am I the only person who doesn’t own an ipod? my husband has a cheap mp3 player that we use for the gym – never understood the ipod appeal when regular mp3 players are so much more affordable)
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Imagine buying a house using this formula
Oh the hours spent…
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Gerard:
I don’t use the formula exactly for buying my house, but I do use the formula to determine the daily cost of my house and from there how many hours I devote to it (5 per work day, or 2.5 if you say I pay for half and hubby pays for half).
The one I can’t stand is how many hours I work to pay my taxes, not just income taxes, but property, sales, gas, and all the other little ones out there.
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Its hard for me to compute cost cause I don’t work. I could use my husband’s time and salary, but that still doesn’t seem fair. I just generally ask myself “Do you need this?” “Need” takes on a broader meaning cause lets face it, many of us don’t truly need most things we buy. But if I’m looking at buying a new pair of jeans and my old ones are adequate I really don’t need a new pair. But if I only have one pair that still fits cause I lost or gained weight then I do “need” a new pair.
I do this in the grocery store. I always find a few things I can take out of my cart cause I don’t need cookies, chips, and crackers…maybe just the cookies
But by asking myself if I really need something I find I curb my everyday spending a lot and this does free up money for other things that I probably don’t “need” either, but I might enjoy more like cable or XM radio.
BTW, Adrienne, I don’t own an IPOD. I use my INNO XM receiver, which has a recording function.
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Stuff now a days cost way more than it works. The average salary across the country is considerable lower than the cost of living. This causes prices to seem higher than they actually are doing to the money people are making.
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My cost has just gone down considering I just made the transition to full-time freelance developer. I work at home, so no gas, and I’ve always taken my lunch, so food costs will be the same
I’m also able to spend more time with my doggy, wake up whenever I want, and work as long as I want without interruptions or corporate mumble jumble. I’m stoked.
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Hi,
This is an interesting way of looking at your expenses. It might help really being aware of what our lifestyle really costs us, and of the huge ratio between what an item costs us and a kind of its real utility rate.
But I can’t make this a way of calculating everything. The time I spend at work is not rewarding me with just money, for example.
But as a kind of reflexion tool on some buying projects, this can be an argument.
Thanks for this piece of thought ^^
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@Adrienne–I don’t even have an MP3 player, and my CD player was a gift. I’ve never owned a stereo that didn’t have a handle on the top.
Shouldn’t we be factoring in that work is 40 hours a week when we aren’t shopping? I guess with the internet maybe only 38 hours.
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I am a computer programmer as well. I spent 4 years getting a university degree. I’m MCDBA and MCSD certified…
…and I now earn $2.05/hour! Put that in your pipe and smoke it!
I’m not quite sure how I’m going to break it to my wife that we’re moving in with my Ma!
Great post!
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I think there is a lot of danger of using this formula. As this way of thinking can make you a miser. Some people out there may hate their jobs so much that very few things are worth their suffering. But the truth of the matter is many could’t quit their jobs and this formula would only rob them of the little they have in their life.
Further, as one of the above said, it can be depressing to realize that it takes you 40 hours to get an ipod. That marginalize their work and may be the final nail in the “it doesn’t matter” coffin.
-ThatGuy
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@Shara Great points. It bugs me that it’s so hard to live without a car, at least in my part of the country (rural Kansas).
@KC I hadn’t thought about that–what if your real hourly wage isn’t measured in dollars? How do you help contribute to the financial responsibility of your household? I like your idea of always taking something out of your cart at the end of a shopping trip.
Something that’s been hinted at but not explicitly confronted is the cost-benefit analysis. Sure, that iPod cost me a week’s worth of discretionary income, but how much enjoyment will it give me? Certainly more than those 40-odd hours.
I’m a personal trainer. I spend ridiculous amounts of time at work, making phone calls, writing workout plans, keeping in touch with clients, or just sitting in my office between appointments. I don’t even want to *think* about my real hourly wage; it’s probably less than $1/hour.
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Personally, I set aside a small portion of my take-home pay (about 5%) for a “luxury” fund. This is for anything that’s irregular enough and expensive enough that it doesn’t fit into my regular spending pattern. (I give myself $8 a day beyond rent, etc. to do stuff like buy a coffee or go to a movie.)
So, for example, my recent haircut ($60 — ouch!) came out of the luxury fund. I’m currently saving for a new iPod, as mine is over three years old. Based on the same 5% model, I should be able to get it by Christmas. Yay!
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I think people should actually use this in evaluating their purchases, especially impulse buys. The fun in life is not derived from what we buy, but what we do. If for instance an iPod delivers hours of music great. But why iPod? “After expense units” keeps the value of our time in perspective and allows us to say if we buy, let’s buy a more reasonable knockoff on eBay for half as much.
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Unfortunately this mindset leads me to think about how much *necessary* purchases cost. A little awareness of rising prices is good, but there’s a difference in having a purchase be really discretionary (“do I want to work X hours/days to buy that iPod?”) and not (“I have to work how many hours to afford one freaking loaf of bread?!”).
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I used to think about this when buying my lunch at my first job (as a teenager). It would sometimes cost me 2 hours just to eat the lunches I was buying. Makes you think twice about buying vs taking your own.
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@Shara: Good point. It’s really important to consider all the costs of car ownership, including purchase price, insurance, gas, maintenance, and even parking!
One point of contention I have, though, is your description of a $20k car as “cheap”. $20,000 is not a cheap car, it’s really expensive! $2,000 or less is a cheap car. I paid $1500 for my car and it’s been going strong for a year now. Even if it broke down tomorrow it still only cost me $4/day.
The total cost for the (four) cars I’ve had over the past 8 years is less than $2500. That’s less than $1/day in purchase price.
Maybe it’s just because I’m on the young side (mid-20s), but to me a car is a car is a car. It gets you from point A to point B and paying an order of magnitude more for some comfort while doing so seems ridiculous. I’d much rather take the extra cash and go to Europe for 2 months.
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