As I’ve mentioned before, the single most valuable personal finance book I’ve ever read is Your Money or Your Life by Joe Dominguez and Vicki Robin. I read this book at a key point in my financial turnaround: the point at which I had hit my financial “bottom” but hadn’t really started to turn my finances around in a real way yet.
One key idea that I took away from this book (and has stayed with me ever since) is the concept that the money in your pocket is merely a representation of time and effort.
First, let’s look at the money in your pocket. Let’s say you have a job that earns you $10 an hour. That means you net $400 per week. However, after taxes, you’re bringing home only $320 per week. You’re also spending $40 a week in gas just for commuting, plus (let’s say) another $20 a week in wear and tear on your car and another $20 a week in work clothes that eventually wear out. This leaves you with $240 for your 40 hour workweek. Of course, you’re also spending 30 minutes commuting each way, so you’re earning $240 for 45 hours of work a week. That’s just $5.33 per hour of work. Every hour you spend working or doing something devoted to work, you’re earning just $5.33.
Thus, the first idea worth noting is that you’re not actually putting as much in your pocket for each hour you sell as you might think you are. You’ve got a good hourly wage, but when you add in the commute time (and other time you invest outside of the workplace) and subtract out all of the extra costs (like clothing, commuting costs, and more expensive lunches, for example), the hourly wage you actually bring home drops precipitously.
So, our wage earner here is actually making $5.33 for every hour of their time. Let’s look at some of the implications of that.
A monthly cable or satellite subscription can easily equal ten hours of work. Meanwhile, a monthly Netflix subscription equals three hours of work for that person. Are these good deals? The Netflix bargain is a better one, but are you really cool with working for three hours just to have Netflix for a month? Are you willing to work ten hours to have your cable for a month?
A dinner at a modestly-priced chain restaurant can equal five or six hours of work invested. On the other hand, making the same meal at home costs two hours’ worth of work in supplies and another hour of work invested. In other words, making dinner at home shaves away three hours of total work. Is that a good deal?
A six pack of decent beer equals an hour and a half of work’s proceeds. On the other hand, going home and drinking water has no cost. Is that a worthwhile exchange?
Many people think that this type of thinking leads to miserly behavior, that you’ll wind up doing nothing fun. What I find instead is that it just makes me more selective in terms of the splurges I make. Splurges aren’t a daily thing for me and that fact conserves money.
What’s perhaps more interesting is that switching to not having a constant flow of splurges makes the splurges I do have much more enjoyable. When I go out for a nice dinner, it’s a very memorable and enjoyable occasion. Several years ago, it was a normal Thursday.
Even more important, the concept of work hours as a cost makes me really appreciate effortless frugality. By effortless frugality, I mean making choices that either require no effort or only a one-time burst of effort to consistently save money thereafter.
For example, several sockets in our home have LED light bulbs in them. According to my math, it takes about 3,000 hours of use for them to repay their initial investment versus a normal incandescent bulb – after that, I save a dime (versus an incandescent) for every 25 hours of use (approximately). I don’t have to put in any extra effort – I just buy things with lower maintenance and upkeep costs and a long lifetime that adds up to net savings over the long haul. There are lots of these types of tactics, such as air-sealing your home or installing geothermal heating in certain northern areas.
Another important angle for this idea is that the fewer of your work hours that you “spend” on unnecessary things, the more you can “spend” on saving and investing for your big long-term plans and dreams. What happens to those three work hours of income that I shaved off of dinner? What happens to those ten work hours saved by not having cable? You can use them to eliminate debts and, if you don’t have debts, saving for the future. A future where you might want a new career. A future where you might want a different home. A future where you might want to start a new business. A future where you might have children.
When you get up and go to work, what are you putting all of that energy and effort into? Are you building a better life for yourself? Or are you merely buying trinkets that are good for a laugh but don’t really change anything? The choice is always up to you.