clockandmoneyLast week I looked at calculating the time cost of discretionary spending. This week, I’ll calculate the savings (according to your real hourly wage) of spending time on “frugal” tasks.

I’ll also look at the time savings that can be made by comparing the opportunity cost of discretionary spending in terms of your mortgage.

First to calculating the hourly worth of frugal activities:

Just say that a frugal task such as making your own laundry detergent takes 10 minutes and saves you $5. The hourly “worth” of making your own detergent is $30.

Compare this with your real hourly wage. Are you earning $30 an hour? Assuming your hourly wage is $15, you are doubling the hourly worth.

So you’re thinking: “yeah, but I only make detergent once a month.” That is $60 a year saved and potentially 4 hours less you have to work.

The point is, that this is just one example. The more you you save, the less you have to work. No, your boss might not look at it that way, but if you’re considering reducing your hours, going part time, staying at home to raise the kids, or taking up study etc, the more frugal tasks you do that save you money, the less hours you have to work.

So what’s the point of doing the maths when “save more money and you can work less” is a real no brainer?

This is where opportunity cost comes in. If you have a limited amount of time, it makes more sense to do the savings tasks that have the highest hourly worth (and therefore give you a better return on the investment of your time) and ditch the things with the least return on time invested.

For example, making your own detergent has an hourly worth of $30 an hour, but cooking your own meals from scratch rather than getting takeaway may give you an hourly worth of $50. And you do this task more regularly. It makes more sense to cook and ditch the homemade laundry detergent. 

Now to compare the opportunity cost of discretionary spending rather than putting that extra money on your mortgage.

The following calculations assume the following:

  • Initial mortgage value = $350,000
  • Interest = 6.5%
  • Term = 30 year
  • Extra payments made in the 5th year
  • Real wage for comparison is $14 per hour

The easiest way to calculate opportunity cost in regards to your mortgage is to use an online lump sum repayment calculator, just plug in your own amounts. Using the calculator this is how much a particular purchase really costs in terms of mortgage interest and time:

  • A $65 dress would save you $310 in mortgage interest, giving you an extra $245 that you don’t need to earn and potentially saving you 17.5 hours work.
  • A $100 meal out would save $476 in mortgage interest, giving you an extra $376 or potentially saving you 27 hours.
  • A $500 splurge would save you $2,375 in mortgage interest, giving you an extra $1,875 or potentially saving you 134 hours work (that’s over 3/40 hour work weeks!) and you shave a whole month off your mortgage.
  • A $3,000 brand new computer would save you $11,934 in interest, giving you an extra $8,934 or potentially saving you 638 hours work (nearly 16 weeks work) and you shave 6 months off your mortgage.
  • A $26,000 new car would save you $88,278 in interest, giving you an extra $62,278 or potentially saving you 4,448 hours (111 months or around two years of work) and you shave 4 years 3 months off your mortgage (or you could buy two cars with the savings).

While these savings are impressive, I think that the real key to being in control of your finances is to employ a combination of financial techniques from debt reduction and paying down the mortgage quickly, to reducing unnecessary expenses, increasing your income, investing and living a life beyond consumerism.

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