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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You’ve probably heard hype surrounding the concept of gearing. Gearing is basically borrowing to invest. More often than not people borrow to invest in property, but you can also borrow to invest in shares in the form of a margin loan. The hype is all about negative gearing, but what is it and what are the other forms of gearing? Below is a quick explanation of gearing.

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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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The words ‘financial crisis’ seem everywhere these days, but you don’t need a global credit crunch or a recession to experience a financial crisis. Financial crisis can be something personal caused by job loss, ill-health, accident or natural disaster.

But does this mean that we are powerless victims to external events, or are there things that we can do to protect ourselves or lessen the blow from financial crises?

Surviving a financial crisis is less about what you do when things are bad, and more about how much you prepare for the worst when times are good. But any time is a good time to start putting a buffer between you and possible crisis.

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Photo by Crotchsplay

If you’re finances are in a mess, if you feel like you’re drowning in debt, or just treading water but not going anywhere, then a website of saving tips and tricks can be overwhelming. Where do you start?

I thought that I would go through a series of steps that I hope will help you on the path of gaining control of your finances.

1. Changing Mindsets – Decide on What’s Important to YOU

I know this sounds a bit fluffy, but the first step in taking control of your finances is deciding to act. Making changes happen when we take action. Decide on your values, set some goals and make a commitment to do what is necessary to reach those goals.

What are values? Values are those things that are important to us. The things that define us. The things that we live for. Our everyday actions, our decisions, and our goals are based on these values. Everyone’s values are different. One value that is important to me is sustainable living, living in harmony with the environment. While I fall short of this value, my decisions are based on working towards this.

We live in a materialistic society. We tend to value materialistic things, outward appearances of wealth, our identity as consumers. If your goal is to save money, then these values may be counter-productive to your goals.

When you decide that you want to save money, ask yourself why. Is it because you have to? Or because you want to pay off your mortgage quickly, or go on an overseas holiday, of finance your children’s education? These are your goals, the reasons why you will make the choice to save money rather than spend it.

Write down your goals. Make them real. Make them specific. Do some calculations. How much will you need to save each week to go on that holiday? How much extra do you have to pay on that debt?

If you’re not single (and even if you are) reaching financial goals will be a teamwork effort so discuss them with your family and get their input. Ensure each member of your family has ownership of the financial goals and are working together towards achieving them. I realise this is easier said than done. But you have to try. Maybe a compromise can be achieved by balancing your goals and their goals. Friends may need to know your motivations, so that they are understanding when you suggest a less expensive restaurant, or a movie at home.

Changing your mindset also involves not thinking about money. I’m not talking about putting your head in the sand. But endlessly worrying about your finances, to the point of it consuming your life is no way to live. Monitor your finances, and then go an play with your kids or read a book and forget about them for a while.

2. Forming New Habits – Stop and Think

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If you’re more comfortable thumbing through the pages of Vogue than you are reading the Financial Review, if you can’t imagine chatting about the all ords, but dating and dieting are hot topics, then you will enjoyFlirting with Finance by Anneli Knight and Virginia Graham.

This book is a humorous introduction into the world of personal finance aimed squarely at women. The book uses topics that the “modern woman” will be familiar with: dating, fashion, dieting and of course flirting, to explain concepts in personal finance.

Despite the light take, the book was inspired by a serious issue. The Financial Literacy Foundation’s Women Understanding Money report found that 52% of Australian women find dealing with money stressful and overwhelming; 25% of women have absolutely no savings for retirement; and of women who do invest, less than 5% look at a company’s background information before investing. In a country where more women are single than are married, and where the divorce rate is almost 50%, increasing women’s financial literacy is an important issue.

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Photo by rimantux

One of the easiest options when starting out in share investing is investing in an index fund.

An index fund is a managed fund that aims to replicate the movement of a specific index. For example, the S&P/ASX 200 is an index that represents the top 200 companies listed on the Australian Share market by market capitalisation. The rise and fall of this index reflects the movements of the top 200 companies. An index fund based on the S&P/ASX 200 holds shares in the top 200 Australian companies and will follow the trend of this index and match its total return.

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