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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