Do You Calculate the Amount of Time You Work to Pay for Purchases?

Many of the top personal finance bloggers list Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence: Revised and Updated for the 21st Century as one of their favorite books, so I recently picked up a copy at the library. I thought it was "ok" (not great -- too much touchy-feely money talk for me), but there were a few concepts in the book that I liked.

One they mentioned is looking at the amount of time you have to work to buy something. For instance, let's say you want to buy a new TV for $2,000. If you take home $40,000 a year (after taxes) and work 40 hours a week, you earn $19 an hour. So to buy the TV, you'd need to work just over 105 hours (or about 2 1/2 work weeks). Is it worth it? Only you can decide, but it does give you a good perspective on how much something costs.

We do this all the time (we've done so for years -- well before I read the book.) Many times I'll be in a conversation with my wife and we'll be talking about how costly something is. Then we'll do the time/work calculation and find that I only need to work something like six hours to pay for it. That helps make the decision more of a no-brainer for us.

How about you? Do you do anything like this? Do you think the method is even valid? Why or why not?

Comments

[Paul]

We have also always done this for large purchases. However, we also take taxes into consideration, since you can only buy things with after tax money. In this case assume the tax rate is approximately 25%. Using a takehome pay of $14.25($19x75%, it really requires 140 work hours to pay for a $2,000 item.

[cmadler]

I think to really make it valid, you have to look at it only in terms of "discretionary" income (I put that in quotes because in the long term, almost all expenses could be considered discretionary). To use your example of someone taking home $40,000/yr after taxes, at $19/hour, if they have a $1000/mo mortgage, a $250/mo student loan, a $250/mo car payment, spend $200/mo on food and $200/mo on utilities, the part of their income that's discretionary is about $8.25/hr. That TV is going to suck up all their "extra" income for a full 6 weeks.

[Apex]

I think the work calculation can be a bit misleading and here's why.

You mentioned that you can do a calcuation and determine that it only takes 6 hours of work to pay for and then it becomes a no brainer.

If your income is fairly large with a large percentage of it available after all other bills that method might work. However for people who lets say make 40K as you used in your example they have non-discretionary expenses like we all do such as food, clothing, shelter, utils, transportation, taxes, etc. After paying those bills they likely have used up 30K+ of their 40K just paying for basic necessities. Some people might be using up most of the 40K for necessisities.

So when you calculate a 2K TV at "only" 2.5 weeks of work it might actually seem like its cheap. Heck, I work 50 weeks a year, thats only like 5 percent of the time I am working. I should be able to afford a new TV and a full blown entertainment center, thats only 5 weeks.

Problem is that if 90% of your money goes to non-discretinoary living costs that there is no way for you to reduce, then you don't make 40K per year to spend as you please. You make 4K per year to spend as you please. That means it takes a full 6 months of working to get enough discretionary income to buy that TV. Thats makes the 2K television decision sound way different than 2.5 weeks doesn't it?

Each of us has a typical discretionary portion of our check available to us each year. Using the entire pay check to calculate the cost of something might lead one to believe its actually a little less "work" expensive than it is.

[Pippa]

I have always worked out what my hourly rate is, that way I knew if I wanted to buy something big how long it would take AND also if I wanted to do something silly just how much of my time it was worth. I think a couple of hours curled up with a book is expensive (given my hourly rate) but worth much more to me!

[MC]

No, I don't do this at all. Income does not equal what you have to spend!

Instead, I rely on knowing what my monthly "discretionary income" is, ie my take home pay minus my regular investments and monthly expenditures, and also minus my monthly $ savings goal.

So when I consider buying something frivolous I ask myself, can I still put my target amount into savings this month if I buy this thing? If not, am I OK with that?

[lurker carl]

"Problem is that if 90% of your money goes to non-discretinoary living costs that there is no way for you to reduce, then you don't make 40K per year to spend as you please. You make 4K per year to spend as you please. That means it takes a full 6 months of working to get enough discretionary income to buy that TV. Thats makes the 2K television decision sound way different than 2.5 weeks doesn't it?"

Apex hit the nail on the head.

[savvy]

I don't evaluate things based on my wages but I do like to calculate cost per use. $150 sounds like a lot (at least to me) to spend on a nice pair of boots. But when I think about the fact that I've had my current pair for 8 years and worn them multiple times a week through each winter, then $150 is worth it.

[KateMTP]

I used a similar system when I was in college and when I first got out of school when I was shopping (i.e. - Is this shirt worth the cost of 5 beers?). I never thought to practically use this thought process by using my hourly wage against the cost of the item.

Thanks for the idea!

[Old Limey]

If you work hard all of your life, live frugally, save hard, learn how to invest very well, and only spend what you need you don't have to worry about topics like this when you are retired.

In addition to pensions and social security we have an invisible slave that works for us 24/7. Last year, totally in fixed income investments, he made 355% of my gross salary upon retirement in September 1992, all of which was tax exempt or tax deferred. That ignores unrealized capital gains last year which would amount to another 442% if I had chosen to liquidate.

[Ken]

The exercise from that book that got my attention was calculating all that I had earned in my life. Then you are asked to assess what you are worth...in exchange for the money earned...an EYE OPENER for me.

[Edmund]

I agree with MC.

A lot of times I don't want to buy something, and I would say "you know how long I have to work to pay for this?". If I am with someone I was always told "not long". It doesn't change the fact that it was a "want", not a "need". Since it's a want, I skip it.

[BillV]

I do it but only for fun not to rationalize, justify or determine if I should but something. I'm not in Old Limey's league but close enough toagree with him. Don't think this was written for us.

On the other hand to do like to do the amortize thing. Spreading the cost over the years I have either had something or intend to have something. Again, I do it for fun.........well sometimes a little justification when I want a new thing, whatever it might be.

[MattJ]

I budget my money, so this isn't an issue.

From each paycheck I pay my bills and stick money into various savings accounts that I have set up for different goals. $250 per biweekly paycheck goes into my 'misc' fund for purchases like this.

The 'time to pay for' calculation works out to be 16 weeks, for me. Doing the calculation your way, I come up with about 1 week. I prefer looking at it my way.

[Lynn]

Yes, I think about how long my husband and I would have to work to "earn" the price of something that we want. We buy everything outright (no credit), but thinking this way helps us focus on buying things that we want and will actually use. I guess cost per use is also a good way to look at as well.

For changes or adding monthly services, like cell phone or internet/cable, we look at the cost over 12 or 24 months to put the purchase in perspective.

[Apex]

@Ken,

I think the idea of looking at how much you have made over your lifetime tends to make people feel ill at where all the money went. Unfortunately I think it's a situation where big numbers look impressive but lead to improper thinking about "where all the money went"

For example, you work for 40 years and make an average wage of 50K per year and have a family (which is almost exactly the median U.S. Family income.)

So that was 2 million dollars over 40 years. Holy cow, how am I not rich?

But just like the other example of the person making 40K and not having much left after living expenses, most people will make well over a million dollars in their lifetimes, many will make more than 2 or 3 million. Those numbers sound huge but unless you intend to live like an absolute hermit for 40 years, you will need to spend most of that 2 million on living and not even living lavishingly, but just living.

Certainly there are ways to get by on less, but I don't think its instructive to look at any gross wages as a means of making money decisions.

Companies make hundreds of millions of dollars and profit less than 10 million many times. Why don't they just keep most of that 100 million. Well they have lots of costs in employees and buildings and equipment and marketing. Cutting any of those by very much is not feasible without reducing revenue. The Government brings in multiple trillions of dollars and goes backwards over a trillion a year, why not just slash spending? Well there are required payments to social security, medicare, aid for dependent children, aid to states for mandated programs, etc, etc, etc. When you get done with the mandates their is only 1/3 of the federal budget left. When you also take military spending out of the picture there is only about 1/10 of the federal budget left. So how easy is it to just spend less?

Gross income is usually a misleading number as it comes to informing money decisions.

[Lord]

Another question. Do you calculate the amount of time you spend making a purchase? It probably depends on whether you enjoy or at least don't mind it, or whether you consider it work and could spend it earning.

[Crystal]

Sometimes my husband uses this method to rationalize splurging, like "$3? Don't worry about it, I make that in 10 minutes. No biggie."

Then I have to remind him that it's $3 from our "fun" money or food budget or whatever, which is not his whole salary (sadly)... :-)

In general, I like looking at the value versus cost of something. Splurging on our 47" LCD TV and corner unit was more than worth it since almost all of our week nights are spent at home with the TV as our main form of entertainment for at least a few hours. But, I still spent a couple of months looking for the best deal.

Splurging on expensive clothing or shoes is not a smart idea for me since I do not take very good care of it. If you don't treat nice stuff nicely, it won't last any longer than Walmart, Target, or Kohl's clothing.

So I guess the best way to look at the cost of things is to know yourself well and spend strategically...necessities and extras that add the most value to your life.

[SAHM]

We look at it in a way that is touched on a couple of times here. We budget our money based upon my husband's base salary- before overtime and on-call work. Then we he does overtime, we do a rough estimate of how many hours he'll have to work to pay for a big purchase. Granted, we don't do many big purchases. We did purchase a tv for Christmas, which was the first new TV we have owned since being married for almost 10 years. We knew it would take him about 4-6 hours of OT to pay for it, but he had also just completed a large project at work that gave him about 12 hours of OT in one weekend! I did lots of research to make sure the TV we bought was not just the best price, but the best one at that price!

[texashaze]

I've never done this and to be honest have no desire to do so. It's interesting especially if you are looking to talk yourself out of a purchase. However, this doesn't factor into budgeting and only takes up valuable time.

[Terry]

A co-worker once calculated that each of us were earning 13 cents per minute; which we both found quite depressing, so ever since I have tried to avoid time/work calculations.

[Mike Hunt]

It's good to think of time vs money calculations when considering to make a purchase but keep in mind the following:

Work is treated like a recurring source of income and this is not to be taken for granted. What if you retire or get laid off, then all bets are off.

Or another way to look at it, when you are unemployed the 8 hour hike you just took wouldn't be worth the $300 you could earn by working...

Terry (aka Minimum wage)- look at it another way, your 15 minute bathroom break / chat times earn you $2. Not a bad deal I'd say.

-Mike

[LotharBot]

I do a lot of calculations. I'm a math nerd. Here are just a few:

1) How much of the appropriate part of this month's budget does this take up? Corollary: what do I need to give up to make room for this, if it's large? (Ex: a $50 meal out takes up 12.5% of my monthly food budget. This necessitates having more rice and less steak at home.)

2) How many hours of work will this cost me? (Ex: my rocking chair cost about 20 hours.)

3) How many days of savings will this cost me? (Ex: if I'd bought the rocking chair in a month where I'd used up the rest of my budgeted flexible spending, it would've cost about six days of savings.) Alternate phrasing: how much will buying this delay the goal that I'm saving up for? (Ex: if I was saving for vacation, buying that rocking chair would delay my being able to afford the vacation by six days.)

4) How much does this cost me per use/enjoyment? (Ex: a sports package that costs $100, and I'll watch at least 100 2-hour games over the season, costs me $1/game or 50 cents/hour.)

5) How much use do I need to get out of this to make it more cost-effective or simply more desireable than some alternative? (Ex: will buying a specialized kitchen implement save me enough hassle to pay for itself? Will I spend enough MORE time in the better rocker to make it worthwhile over the cheap rocker?)

6) What is the value of the space this will occupy? (It may cost a few bucks every month to store some bulky item.) Alternatively, how much am I willing to pay to preserve the amount of space? (Ex: is the $30, low-profile desk lamp worth it in comparison to the $10, bulkier lamp?)

Calculations like these aren't the only thing that go into a purchasing decision. But they are useful tools -- knowing how much time, effort, money, space, or enjoyment you'll put into and get out of something makes it easier to decide if it's worth it.