the true value of money
There's a concept familiar to many in the personal finance community that allows us to find the real cost of any purchase. It's the idea first introduced in the book, "Your Money or Your LIfe" that says the
true cost of a purchase is how much life we exchange for it. This is a simple concept that only requires you to figure out how much you earn per hour. With this number you can then determine how many hours of your life you're trading in for a purchase. In this post, we'll figure out just how much common purchases are really costing us.
Most people think they earn more per hour than they do, because they don't include many expenses that are work related such as commuting, attending conferences, buying a work wardrobe, etc... Let's calculate the income per hour of a person earning $100,000. Most 40 hour workers work roughly 2,000 hours per year. When we add the time spent commuting (let's say 7 hours per week), plus a few more hours a week for work events, taking clothes to the dry cleaner, making your lunch, etc.. that gives us an extra 10 hours per week or 50 hours per year. Let's not forget to add extra hours for late nights and work travel which can easily be another 5 hours per week. Our total hours are now 2,750 per year.
regular work = 40 hours per week x 50 weeks = 2000 hours per year
commuting/work events/other = 10 hours per week x 50 weeks = 500 hours per year
extra hours = 5 hours per week x 50 weeks = 250 hours per year
Total = 2,750 hours per year
You can use this 2,750 hour assumption as a general estimate and calculate your own income per hour. For our example the true income per hour is;
$100,000 income / 2,750 hours = $36 per hour
So, a person that earns $100,000 really only earns $36 per hour. Most importantly, this is also before taxes, so an appropriate after tax number is more like $25 per hour. Because we purchase goods with money that has already been taxed, the $25 number is the one we should use. Keep in mind this number will be lower for anyone that earns less than $100,000.
Now, let's look at three common purchases that we make during our lives to understand their true cost.
An iphone 8 plus starts at $799. Yikes. That's a lot of money for most people but we all need a phone right? Well, in exchange for that phone we're trading in 32 hours of life (or more if we earn less than $100k). That's 32 hours of 9am staff meetings for a phone. Is it still worth it, or is there a $300 model that might be almost as good while giving you more than half of that time back?
2) fancy countertops
Look no further than HGTV to see America's emotional decision about the material that comprises their kitchen counter. No one seems to care much about the material used for their roof or walls, but somehow we've become obsessed with upgrading something that adds no practical value to our lives. Me very rough estimate of $50-100 per square foot for a modest sized quartz of 55 square feet implies that we spend close to $5,000 for nicer countertops. Unfortunately that's 200 hours of our lives for this kitchen upgrade that in no way makes cooking any easier. Not to mention, styles come and go and this upgrade will have to happen more than once in a lifetime.
3) luxury car
Nothing drives me (no pun intended) more crazy than people spending too much on cars. They depreciate rapidly and most people borrow money to pay for them. That's a financial double whammy. Worse yet, Americans use these idiotic financial decisions as a status symbol as if to say, "look i'm dumber than you". All the data tells us Americans are struggling financially yet luxury cars are
everywhere. So what does a $40,000 luxury car really cost? Only about 1,600 hours of your life! That's approaching a year of work with all the stress, late night and commuting. And how many cars do we buy during our lives? 10? If you're driving a luxury car, you must really like spending time at the office with your boss.
While we used three expensive goods here, you can use this thinking with all of your purchases like your daily lunch, coffee or other discretionary purchase. The purpose is not to discourage people from spending, but to encourage them to be more mindful and think of alternatives. In the above three examples there are less expensive options for each such as a cheaper phone or a more reasonably priced or used car. When we put the purchases we make in the context of their true cost in terms of our life hours, we start to live and spend very differently.