Last 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.
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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.
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Opportunity cost is a fundamental economic concept that affects our everyday lives.
Opportunity cost basically refers to the opportunity that you forgo by making one decision over another. Despite it being an economic concept (and being a ‘cost’), the opportunity cost of a decision doesn’t necessarily have to be financial. In fact, we weigh up opportunity cost (often unconsciously) all the time when making decisions:
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A quick glance at your payslip will tell you what your income is. Quite often we base financial decisions on this gross amount (or even the after tax amount) rather than taking into account the cost of earnings. So what is your real hourly wage and how much does this differ from the amount printed on our pay slip?
Obviously, tax is the first thing to think about when calculating your real hourly wage, but there are also hidden costs to earning income that once taken into account can significantly reduce the amount that you actually earn.
Why is this important? While it may seem pretty obvious, it is easy to make the mistake of basing your spending on gross earnings rather than actual earnings and this leads to debt. Often when people get say a $2,000 pay rise, they spend as if they got a $2,000 pay rise, when in actual fact, the in-the-pocket amount is much less.
When making financial decisions such as calculating how much mortgage you can afford to repay, basing your repayments on your actual wage rather than your gross wage will give you a more realistic picture of what you can and can’t afford.
How to calculate your real wage – an example:
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While these days you can have multiple savings accounts without incurring extra fees, it’s often easier to keep all your savings in one account. But if you’re working towards a variety of savings goals, how do you keep track of your progress towards each goal?
I like to use an excel spreadsheet to allocate various savings amounts to each savings goal and monitor my progress. This sheet forms part of my budget. Below is a tutorial on creating a savings spreadsheet similar to the one that I use. This spreadsheet may seem a little complicated, but once it’s set up it is easy to use, you just plug in your numbers ever month the formulas take care of the rest. I like to update mine every time I do any online banking.
Of course, you can create a much simpler spreadsheet, or just use an exercise book and a pen, which is how I used to track my savings for years before moving to excel.
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This tutorial is a follow on from Part One where we designed a basic budget. In this tutorial, we’ll copy and paste the budget format over to create a spreadsheet for actual income and expenses and a variation spreadsheet that will show the difference between what we budget and what we actually earn/spend.
If you haven’t already, check out Part One of this tutorial.
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Excel is an awesome programme for personal budgeting. I have been using it now for 3 years. When you create your own budget yourself, you can customise it to meet your own needs and circumstances exactly.
This tutorial starts from the very beginning for those who have never met a spreadsheet before. I use Excel 2007 so if you’re using the older version of Excel, you will find the same functions in the tool bar and menu bar. If you don’t have Excel, then the free alternatives (Open Officeor Google docs) are pretty similar and this tutorial should still, I hope, be helpful.
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Tracking your expenses day to day is fundamental to knowing exactly what you’re spending your money on and how much you’re spending. Writing down all of your expenses is also the basis of a good budgeting system.
Like any habit, writing down how much you spend and on what takes a little time to remember to do. To make the task easier, I’ve created some printable household expense worksheets that you can download.
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It’s the beginning of the new year, and many of us are making New Year’s Resolutions regarding our finances.
Before working towards these financial goals, you need a starting point, a yard stick to measure your progress and your success against.
So the beginning of the year is a good time to write down your financial starting point and keep it somewhere safe. Your starting point may be zero, that’s ok, write it down anyway. If you use excel to track your progress towards meeting your financial goals, it’s fun to use a graph to track it visually.
I’ve been doing our budget and tracking financial metrics since 2005 now, so it’s really interesting putting all of these balances into a spreadsheet and charting them. You’re not just guessing at your progress, you can actually see your progress (and areas that need improving).
So what is your starting point? That depends on what your goals are and what you want to measure, but here are a few common financial metrics to track.
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Even though the new year is up and running, I usually take some time to look back over the previous year’s household budget and evaluate how we went and what areas we can improve on. The accountant in me loves this kind of number crunching analysis and it’s motivating to see in black and white just what has happened with our finances over the last 12 months.
While it’s easy to guess or get a feeling for your finances, I can guarantee that doing the figures always offers up a few surprises.
So I thought I would show you how we went over the course of 2009 and what kind of information can be gleaned from keeping a budget. It’s great to write down your balances at the end (or beginning) of each year so you can make these comparisons and track your financial progress.
The figures below are based on a comparison between 2009 and 2008 (I’ve just taken the difference between the two balances and shown that difference as a percentage of 2008) and answer the questions: are we better off or worse off? Are we working towards our financial goals? How are we going?
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