The Value of Money

ymoylAs 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.

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  1. chuck says:

    great post. you now have me wondering if there is anything in my house worth its time in work. given that i hate my job i would have to say no.

  2. Amy says:

    My Mom taught me as soon as I started working to figure out how many hours I would have to work for something. To this day, that still runs through my head when I am making a purchase. Even without figuring in taxes and the other things, it is a good quick framework to think about the real “cost” of things.

  3. Gerald says:

    Great way at looking at things. It takes me roughly 2 hours to commute when I leave work during rush hour traffic. That really dilutes my dph figures. What year is the teleporter suppose to come into existence?

  4. Amber says:

    So simple. So good.

    Getting clear and real about money makes life weigh less.

    Thanks for your writings. They always encourage us.

  5. Adam P says:

    What figure am I meant to use? I am paid salary but I work variable hours every week…so I don’t know how to work that in. I guess an average? Also, is this gross wages? Net of tax? Net of employment insurance, health insurance, pension deductions? I could make $58 an hour or $30 an hour depending on how many hours a week I work and if I’m using gross or net pay.

    Guess I’m picking nits here…I do love YMOYL and think it’s one of the best out there. What I take away from this is to spend where you get a good enjoyment/dollar spent ratio, and to minimize commute time.

  6. glinka says:

    Does the value of a thing I own change if my pay scale goes up? If retired, does the money spent from 401k count as the amount paid in or the zero pay earned at present.

  7. Max says:

    This is a very well written article and got me thinking about my own finances. I currently work at an average hourly rate, but I tend to live more extravagantly than I should. I calculated it out and I spend on average 5.5 hours of pay on lunches every pay period and that doesn’t count the weekends. I also commute an hour everyday and with the gas prices in Chicago I lose an additional 10.5 hours of work per pay period in cost. Just on these two expenses alone I only take home 56 hours per two weeks. I need to think of something to combat this. Make my lunches and maybe buy a moped!

  8. Kendra says:

    My life earthquake started in March. At 5-6 mos. pregnant with baby #3 I was put on bedrest for a couple weeks. The company didn’t want me back. I’ve been unemployed since…we’ve depleted all liquid savings living on my fiance’s income. The company challenged unemployment so I haven’t been able to collect. I haven’t found a job. I’m stressed. I have a Masters in my field and dream of starting my own company and working from home. Even part time (15 regular clients) would supplement the household income enough to support the family and I’d have more time for REAL priorities – my kids. I have a plan, but I’m so afraid of failing… I can do the work easily and run a company, but I struggle socially and I’m not great at marketing. I’d love some advice on dealing with the “panic” and anxiety. I know that in order to succeed I have to work through it. This transition phase, not knowing what to expect, lack of regular paycheck, lack of daily mundane routine, etc. is causing anxiety and mild depression.

  9. *pol says:

    I’m still getting through YMOYL…. it’s not engaging me as much as I’d like. That being said, I agree wholeheartedly with being realistic about how much I “really” get paid, and what my “disposable” income really is. For years, I have figured out whether I should by a frivolous item by factoring in how long I have to work to pay for it.. and I figure out the hours by adding up taxes/housing/transportation/ savings/necessities that already have a claim on a percentage of every take-home dollar I earn! It leaves me with a very tiny amount per hour to play with! Sometimes I think it’s worth the effort so I go for it! Other times I shake my head and move on.

  10. Troy says:

    A few flaws here:

    1. “the money in your pocket is merely a representation of time and effort.”

    Who’s time and effort. The insinuation is ours. What if you found the money. Won it, inherited it. What if you were lucky and picked the right investment, or sold your house at the right time and made lots o’ dough.

    There are several ways to get money in your pocket. Many of them require time or effort. but many require neither.

    #2. Since when is value or worth determined by income. Using your example it takes three hours of work to make dinner at home. That example works when you make $10 per hour.

    But it starts to fall apart when you make $200 per hour.

    A meal at the drive through or a new album cost one person an hours worth of work. If that person suddenly now makes a much higher income (thing resident physician vs practicing physician) is it still worth one hours time.

    Of course not. That is because value has nothing to do with what you earn. It has to do with the cost versus utility.

    3. This is another post supporting trading the present for the future. It is just a dangerous to ignore the present and focus on the future as it is to focus on the present and ignore the future. Sacrifice is a two way street.

  11. moom says:

    You choose a low rate of pay here to make your points. If my wife and I go out to eat at a cheap restaurant (as per your example) it costs about half an hours work for each of us and an hour each if we go to a slightly nicer place. We do this usually once a week unless we are on vacation. I think this is worthwhile.

  12. Lindsay says:

    Think that book is a must read. At times it put me to sleep, I would say its a great reference as its a book that should be read over and referred too.

  13. Annie says:

    I think overall this is a good post. I get paid a salary and i never stopped to calculate how much i am actually making per hour after my ride in to work and the other issues that Trent mentions. In this economy, i am just glad i have a job and a salaried position. I treat myself every week to either a nice lunch or dinner out with my friends and get coffee once or twice a week. I have no guilt over it nor do i feel like i am wasting money. It’s a part of life to do these things. I figured I saved already and paid my bills on time why worry about how much i am worth per hour at my work. I am just glad i have a job.

  14. Andrew says:

    Kendra, if you struggle socially and are not good at marketing you will not succeed as an independent business owner/ consultant. A huge part of such an enterprise is selling yourself.

    Also, harsh as it may sound, if your true priority is your children (which is wonderful in and of itself) that will come through as a negative to potential clients. They will not want to hire someone who thinks that they are not all that important.

    I think your dreams may remain just that–dreams.

  15. Roberta says:

    After years of hearing about how lifechanging YMOYL was for so many people, I finally took it out of the library. It didn’t resonate all that much with me. I’ve always paid my bills on time, saved for the future, carefully distinguised real needs from real wants. I think what left me really puzzled was what came across as the underlying idea that everyone hates what they do for a living, should live incredibly cheaply while doing that thing they hate, and save so much that soon they can stop doing that thing they hate and do what they really want to do, which all seem to be really therapeutic community/green revolution/community volunteer kind of things. Where does leave someone who doesn’t hate what they do? Or enjoys living today while still saving prudently for the future? Or doesn’t want to spend the rest of their functional years doing those things? My sister died at 50, my brother in law at 37, one of my children at 18… yet my grandmother lived until 93 and my mother just passed away at 87. So I have equal impetus to enjoy some things in life now while my husband and remaining children can enjoy them, and still save for the future needs we are sure to have ($10,000 a month in nursing home costs for my mother used up almost an entire lifetime of savings and house resale assets). I guess the whole point is balance.

  16. Micki says:

    LOL, this post is, as always, to timely! Trent has a real gift for saying things I thing about in concrete, easily relate-able terms!

    I did make $10 an hour, and I struggled financially. Last year, I was fortunate enough to land a position making 1.5 times that…and between the increased commute, gas costs, and other time sucks related to this job, I see very little increase in income, and a large decrease in my peace of mind, family time, and free time.

    I am looking for another $10 job closer to home, so I can devote 40 hours a week to my employers needs, and the remainder to my family (and myself, hopefully). I would honestly rather struggle a bit financially, and have a healthy amount of family time. I want more time than what is typical in today’s world, actually.

  17. kristine says:

    Andrew, you were a bit harsh, but correct in that a business cannot succeed without successful marketing. Especially now. I suggest she look make sure the startup plan allows for hiring a rep or PR firm.

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