Mar

the time cost of spending

We are used to thinking about spending in terms of money. The opportunity cost of purchasing that new dress is the interest we could be earning on our savings, for example.

But what is the time cost of spending?

Modern western society tends to live on a work to consume cycle. We go to work to earn money to buy goods that we have little time to enjoy because we have to work longer and longer hours to pay for them (and the credit card interest). Often the more important opportunity cost of purchasing unnecessary consumer goods isn’t how much money we could be saving, but how much time we could be saving.

So how much time does your spending cost? And how do you calculate your time cost?

Warning: While it’s good to be financially aware, doing these calculations all the time on everything can get really depressing. Or they could be motivating. Proceed at your own risk.

1. Calculate your real hourly wage. You could use your net or gross hourly income but your real hourly wage will give you a more accurate picture.

2. Divide the purchase price of the item in question by your hourly wage. That’s how many hours you will have to work this week / month / year / life to pay for it.

So if your real hourly wage ends up being $12 per hour, it will take you two hours of work to pay for tonight’s KFC.
If you decide to purchase a new iPod for $250, you will need to work nearly 21 hours to pay for it. And that’s if you’re not accruing interest on the purchase.

Let’s take this concept one step further. Most of us aren’t working only to pay for discretionary spending. We have mortgages, rent, utilities groceries… In other words, after deducting necessary expenses, we don’t actually have $12 an hour for discretionary spending. So how much do you have?

1. Look at your budget and calculate how much of your earnings go towards the essential or fixed expenses as a percentage.

2. Deduct this amount from your net income (you could use your real wage here, just ensure you’re not counting work related expenses twice).

So if your real wage is $12, and your net wage is $15 and 80% of your earnings go towards essential expenses, only 20% ($3) is left over for spending and saving. A $250 purchase will actually cost you 83 hours or work.
Assuming a 40 hour work week, it will take you just over two weeks to earn enough to pay for a $250 purchase.

But we’re not really working two weeks straight to pay for our purchase. We still have to pay the bills. If 20% of our earnings are left for discretionary spending, then it will actually take two and a half months to pay for a $250 purchase and that’s only if you’re not accruing credit card interest on the purchase also.

This is more easily demonstrated with a diagram. The idea for visualising this information came from Steadfast Finances.

Below is a diagram of our personal earnings. As you can see, our mortgage takes up a fair chunk of our net pay. We only have 4 hours per month where we are earning money for saving / spending (the ‘left over for us’ amount). Based on the graph below and assuming that our net hourly wage is $15 an hour, it would take us over just over four months to save for a $250 purchase, more if it were placed on credit and accrued interest.

What do you do with this information? Well there are a couple of variables that you could work with.

You could reduce discretionary spending
You could ensure that discretionary spending doesn’t accrue credit card interest
You could reduce fixed expenses so that there was more money in the kitty for discretionary spending / savings
You could earn more money

Doing these calculations gives you the opportunity to think about the effect of single purchases (these add up), how your income gets spent, the overall state of your finances and the affect on your overall lifestyle if you earn more. Next week I’ll look at the time cost of saving and how thinking about spending in this way can help you to save more money and even knock years off your mortgage and bring your retirement date closer.