In physics class, we learned about the law of inertia – an object in motion stays in motion. So it is with our money. We start spending and we keep spending!
Now we’re trying to slow down our spending and find ways to save money. Today, we want to discuss a new way to think about your purchasing decisions.
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Hear George & Mary-Lynn discuss today's topic on The Bigg Success Show! Click the purple player: Play Now | Play in Popup | Download
Hear George & Mary-Lynn discuss today's topic on The Bigg Success Show! Click the purple player: Play Now | Play in Popup | Download___
Getting to the numbers
The Bureau of Labor Statistics (BLS) tracks many things, including consumer finances. From their most recent study, we calculated how much the average wage earner makes a year.
We then did some more research to determine how much vacation we take and how many hours a week we work, on average. From all this data, we determined that the average earner made $19.38 per hour before taxes.
Next we looked at spending by category, according to the BLS study. We divided that amount by the $19.38 an hour to determine how long we have to work to pay for what we buy.
The numbers
The average American wage earner works for almost a month to pay for entertainment and dining out.
We work about a week and two days to pay for our vacation. Think about that – we spend more time working for our vacations then we spend on them!
And since we’re nearing that time of year where we’re all feeling extra generous, we also found that we spend a full week working to pay for Christmas presents.
There’s power in this tool for you
It may be useful to think about past spending decisions, but the power of this tool comes in helping you make decisions now.
For example, say you’re the average wage earner thinking about purchasing a LCD HDTV. It would cost you around $600. You would have to work two-and-a-half days to pay for that TV.
Is it worth it to you?
A bigger house
We recently saw that the median price for a house is $200,500. You would have to work two months and a week every year to make your mortgage payment on that house.
You may not be thinking about a bigger house now. But let’s say the day comes when you decide you’d like to stretch a little. The median priced house was requiring 19% of your income; you think you could handle 25%. Now you’ll have to work three months out of every year to pay the mortgage on this bigger house.
Is it worth it to you to work three extra weeks every year just to pay your mortgage? Is there anything else you would rather buy with your hard work?
The formula
So far we’ve talked about averages, but they don’t really matter. What matters is how much you make per hour. Here’s how to calculate it:
Your pay cycle may not be a week, but you can adjust accordingly. The BLS statistics look at before-tax income. Ideally, you’ll look at disposable income – after all taxes have been paid – since that’s the only money you have available to spend.
As salaried employees, we often don’t fully track how much time we work. You may have to track it for a week or two. If you really want the full picture, include your commuting time and any other job-related time.
Invisible expenses
Don’t just think about your major purchases. Consider your invisible expenses – those frequent small purchases that can really add up over the course of the year.
For example, say you spend $5 every day on lunch. Over the course of the year, that would add to $1,275 (assuming one week’s vacation). The average earner would have to work 66 hours to pay for this.
Is it worth it?
You might look at that and decide that it’s not. You start packing a lunch which only costs you $1. Now you would only have to work thirteen hours a year to pay for your lunches.
That’s 53 hours of work that could be spent on something else!
How about a nicer vacation, starting that emergency fund, or paying off the debt that’s keeping you up at night?
So frame your expenditures by the number of hours you have to work to pay for them. Then ask yourself if it’s worth it. It’s a great way to prioritize your spending.
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Thanks for visiting us today. Come back next time when we discuss why you can’t have it all, but you can have all you really want. Until then, here’s to your bigg success!
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(Image by House Of Sims, CC 2.0)
We all experience trade-offs. One of the most significant ones is time and money. If we have money, we can use it to buy services that give us more time. Another trade-off is status and money.
When I was starting out in my radio career, I helped out quite a bit in the production department putting together commercials. I eventually became the go-to person when the production director wasn’t available. When I asked for more money, I was told it wasn’t in the budget but they gave me the title of Assistant Production Director. This helped me negotiate for a higher salary when I left for a different market.
Two of my friends are best friends. They don’t do this anymore but, when they were first starting out, it was almost comical to watch them compete with each other. One bought a new car; within a month or so the other got a new car. One of them bought a new house; the next thing you knew the other one had his house on the market and was buying a new one. One got married; soon the other was engaged. One had a kid; soon the other one was an expectant father!
