The Big Trade

I've said it before and you'll hear me say it again; personal finance is just as much about the relationship we have with money as it is the actual handling of it. That's why you'll hear a lot in the personal finance world say that using actual cash to pay for things pains us. Handing over cold hard cash when we pay for things hurts. We spend less when we pay for cash. Dave Ramsey talks about its benefits all the time.

When we start working on our relationship with money, we start to make more conscience decisions about how we want to spend it or how we want to save it.

Your Money or Your Life has one of the best exercises for putting emotion in to your spending habits. It requires you to calculate your real hourly wage. By calculating your real hourly wage, you can determine how much of your life energy you're trading for how much money you make and spend. Basically, how much money are you making for the amount of time you work. In order to figure out your life energy, you need to figure out your real hourly wage.

It's not just taking your paycheck and dividing it by the amount of hours you were punched in. There are other factors that go in to determining your real hourly wage such as commuting, clothes for work, meals, job-related illness, escape entertainment, etc.

Let's go through an example.

  • Jon makes $750/week for working 40 hours. If we're just talking strictly hourly wage, he makes $18.75/hour.

  • His job requires him to wear business casual work attire which costs him about $20/week and an hour of his time. This includes the amount spent and the time it took to shop for those clothes (total for the year divided by 52), shaving and tying a tie every morning. So add an hour to his total work week hours and subtract $20 from his paycheck. $17.80/hour (730/41).

  • It takes him 30 minutes to get to and from work every day and costs him $70/week in gas and maintenance. Add 7 hours to his work week hours and subtract $70 from his paycheck. $13.75/hour ($660/48).

  • Jon gets a Starbucks every day and eats out for lunch as well. This costs him on average about $50/week and adds 5 hours to his work week. $11.50/hour (610/53).

  • Every Friday, Jon gets drinks with his co-workers to unwind from the week. He spends $30/week and adds 3 hours to his work week hours. $10.36/hour (580/56).

Jon's real hourly wage is $10.36 per hour. Before taxes.

So what's the point?

Calculating this number is huge. It puts a real perspective on how much you're actually getting paid for your job. It also helps you realize how much of your spending is based around your job. Lunches, coffee, clothes, decompression. And you can start making conscience decisions around that spending. When you've got this number, you can start making changes to your spending that will help bring up your real hourly wage.

Making your own coffee instead of Starbucks

Bringing your own lunch instead of eating out.

Riding your bike to work or using public transit.

But aside from knowing what you're actually getting paid, knowing this number can help you make big decisions in your life.

It helps you make decisions on your current and future employment

If you're thinking about switching jobs, there are a lot of factors that go in to making that decision. Pay, benefits, culture, type of business, commute,{enter your reasons here}. By calculating the real hourly wage, you can compare that to what you're current real hourly wage is.

Will your commute be less?

Is the dress code more relaxed?

Is it less stressful so you don't need to decompress as much.

You can use this calculation to determine whether or not the financial aspect of switching jobs makes sense.

It helps you make decisions on your spending

Knowing this number not only helps you make spending decisions related to your job, it helps you make decisions about spending in all categories. You now know EXACTLY how long you have to work in order to buy something and you can ask yourself,

"Will I get enough enjoyment out of this for the amount of hours of work I have to exchange in order to buy it?"

This is the big trade.

This is the question you should ask every time you buy something. This is the question you should ask as you're making your budget every month. Is this thing actually worth the amount of life energy you gave up to buy it?

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Cover photo by Felix Russell via Unsplash

Brandon LaFave

Brandon is a personal finance blogger sharing his and wife's journey to financial freedom.


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