Now that I’m working full-time at an hourly rate, it’s almost too easy to quantify purchases in time.
This habit of calculating my spending in terms of hours worked has been dormant as a freelance writer/blogger. At that time, my income was all over the place and seemed to be in no way correlated to the amount of hours I worked. Now I know exactly how much I’m paid per hour of work, and the result is time is my new metric for what’s in my bank account.
If you’re getting excited because you’re salary translates to a high hourly rate, slow down. Your net disposable income is probably less than you think!
First, you have to take off 20% to 30% just for things like income tax, CPP, and EI. As a result, what hits your bank account is actually only about 70% of your gross pay. Say you make $25 per hour:
$25 x 70% = $18.75 net hourly wage
Not bad right? But realistically you don’t get to spend everything you make. Some (most?) of your income goes to meeting a heap of financial obligations, not the least of which is keeping a roof over your head and food in your stomach. If your needs take up 50% of your income (assumption: 30% housing, 10% transportation, 10% other including groceries) and you’re a diligent saver putting at least 10% away in savings, then you’re disposable income is only the remaining 40% of your net income:
$18.75 x 50% = $7.50/hr disposable income
Now, that actually isn’t too bad, considering it’s for every hour of every workday. What it is good for is quantifying potential purchases with time instead of money.
A $5 latte takes 40 minutes of work to afford. Since a latte doesn’t even take 40 minutes to drink, is it really worth it?
Maybe you’re better off working only 16 minutes to afford a $2 drip coffee instead.
Suddenly you see that $100 pair of shoes takes 13 hours, or one and a half workdays, to afford. If you’re having dinner with friends tonight, you’re spending nearly 3/4 of the day working for it. And so on. If you’re a daily spender, this quick calculations should help reel you in. If you’re naturally less spendy and only buy 1 latte per week, then working 40mins out of your whole workweek for that treat might seem more reasonable.
If you’re in debt: How many hours of your life are already spoken for to pay off you past?
Even if you owe something as small as $5,000, you’re on the hook for the next 16 weeks — and that’s assuming you don’t spend any of that $7.50/hr of your disposable income on anything but your debt! Thinking of your spending in the context of the hours it takes to work for it can be discouraging, but remember it works the opposite way too:
Saving now reduces the number of hours you need to work later.
As you saw in my latest post how saving $100,000 in my RRSP by age 33 would net me over $500,000 by retirement, which means that’s a full $400,000 I wouldn’t have to earn. How many hours would it take to earn $400,000? In my working lifetime, at $40 per hour, that’s a full 10,000 hours or 5 years of a full-time income (that’s 10 years if you assume my obligations take up 50% of my paycheque!). Saving now means not having to work later.
So next time you’re about to make a purchase, ask yourself, how many hours do you have to work to afford that?
And if you’re really into this concept, I encourage you to check out the movie “In Time” on Netflix which I’ve recommended previously just because it’s such a cool idea to quantify our lives in minutes instead of dollars!