So, you’re about to go out to grab a meal at a new restaurant in town. The meal will cost you $25 and the two beers will cost $14. With tax and tip, you’re out the door for $51. But wait – how much did that meal really cost you?
Or let’s say a new book from your favorite author was just released and, instead of checking it out at the local library, you decide to order it on Amazon. Sure, you have Prime, so delivery is free – but the book still cost you $22 because it is in high demand during the release. $22 isn’t much – right?
What about the upgrade for the car you’re looking to buy? You’re already spending $29,000 on the car, so what’s the difference if you spend another $2,000 for the heated steering wheel? You’re not going to notice $2,000 on such a large purchase anyway – isn’t that true?
I want to challenge the way you see purchases and have you consider shifting your mindset from a world where you measure purchases in dollars to a world in which you measure purchases in time.
Sound weird? Yeah, that’s fair. But it’s a mental shift that is worth making. Allow me to explain.
Let me start my explanation with a question: After tax, how much do you make per hour? If you don’t know the answer to that question, let’s walk through the math together.
Start with your salary. For this example, let’s assume you make $70,000 per year. Let’s also assume that you are married and filing joint taxes, which means you are taxed in the 22% bracket after taking the standard deduction. That means, you’ll pay about $10,000 in federal taxes annually. Adjusted for taxes, your take-home pay is about $60,000 per year. If we assume the standard 40 hour work week over 50 weeks (I’ll assume the “standard” 2-weeks’ vacation per year), that means you’ll put in 2,000 hours at your job annually. Simple division of $60,000 over 2,000 hours will reveal that your net earnings per hour is $30.
So that meal out? It will cost you 1 hour and 42 minutes of work.
That newly released book? It will cost you 44 minutes of work.
That heated steering wheel upgrade? It will cost you 22 hours and 40 minutes of work.
This mindset is helpful in combating impulse spending in that it forces you to justify the purchase with the single most valuable asset any of us have: time. Time is the only thing that you can’t get more of – and the only resource each person is given equally.
By adjusting your point of view on the cost of things from dollars to time, you begin to re-evaluate purchases and spend your money more wisely because you aren’t seeing the spending simply as dollars in your wallet or digits on your online bank profile – but rather in actual hours and minutes of hard work.
Another way you can use this same mindset adjustment is to think about how much of your time at work is already spoken for from a financial lens. Using the same example above, let’s assume your mortgage is $1,600 per month. That means that you will spend 53 hours and 20 minutes per month to pay for the roof over your head. For the first 7 working days of the month, you’re only paying for your home.
You can think similarly for utilities, cable, internet, cell phone, gym memberships, etc.
If we take that $1,600 in mortgage obligations and add $600 for other monthly bills, the total monthly payments for these expenditures becomes $2,200 – or 73 hours and 20 minutes. That is a daunting amount of time spent working to cover these monthly bills. If you break that out of hours and look at days, that is 9.2 days of work – nearly half of the working days in a month – spent laboring to send payment on time.
Now I’m not saying these expenses are bad. Having a roof over your head and electricity to power your home are incredibly valuable. A big reason why people work is to provide these types of amenities to family and friends. There is nothing wrong with that at all – it’s just to illustrate how quickly the hours of your work day are already spoken for when thinking financially.
When you think about the next gadget you feel compelled to purchase (iPhone X: $1,000 or 30 hours, 20 minutes) or a few bottles of wine because they’re on sale (6 bottles of wine: $75 or 2 hours, 30 minutes) – ask yourself how many hours you’ll need to spend working to cover that purchase. Once you’ve solved for X, you can decide if the purchase is worth the time. In many cases it will be, and when it is, by all means – spend the money! But in the cases where the time doesn’t equate to the enjoyment, put the item back on the shelf or don’t click “Add to Cart”. Your working self will thank you.
It’s kind of scary to think about how much of our working lives is spent taking care of the bare necessities. However, I think it is one of the most important points Eric makes above. That couple of drinks and a meal may cost you an hour and a half, but how you think about that time matters.
If you’re thinking of it in relation to your overall work month, it may not have as big an impact. One and a half hours out of an average 167 hour work month is roughly one percent of your time. No big deal, maybe. But if half of your time is already accounted for in obligatory expenses, that number rises to two percent. The impact has doubled just by looking at it differently
It’s important to break down what is absolutely necessary (time that’s much harder to control) and what isn’t. You can control what isn’t, but a lot of time what you can’t control are the life essentials. Sure, you could get a new house with a smaller mortgage, but that also costs a lot of time and money. Utilities can be adjusted, but generally you are not going to negotiate a lower rate on water or electricity. By knowing the real amount of hours you actually have to play with, it makes those decisions even more important.
So, why is it so important to understand the hourly cost of consumption? Well, if you are a salaried individual, you often don’t think about how much you’re making on an hourly basis. Even if you’re not, it’s important to understand the true cost of where you’re spending your money. Time is the only thing that we can’t get more of, so if you’re being inefficient with it, you’re throwing it away forever. Time is something you can never get back.
Even more so though is your understanding of how you spend your money. In today’s digital world, it has become so easy to not understand how much money we are spending. When you have cash in hand, you have something tangible that disappears. A credit card doesn’t have that same effect. By focusing on time, rather than money, you have a better understanding of the true cost of what you’re buying.
Now, some people may look at this and think that they’ve already got their finances under control, so this advice isn’t applicable to them. I would challenge that premise. One of the most important things we are trying to do here at Thriving Millionaires is to help people think about their finances from the right mindset.
An investor is always evaluating different scenarios and thinking about things in new ways. It’s how you differentiate yourself from others. While this frame of mind may not be incredibly impactful for some from a financial impact standpoint, it can have a tremendous impact on the way you make decisions and evaluate your overall financial framework. This will serve you will as you plan and prepare for the future.
Time is money. Money is earned with your time. Don’t forget it.