This week, The Simple Dollar is conducting a detailed review of the personal finance philosophy title Your Money or Your Life. This book looks at a whole-life approach to the relationship between a person and his money and applies a nine step process to fleshing out this relationship. Do these methods work? Let’s dig in and find out!
The plan starts off with a series of psychological sledgehammers that can really change your perspectives on money. These steps are relatively unorthodox, but often bring to light the actual value of money in your life compared to the value you put on money.
Right off the bat, Your Money or Your Life goes in an interesting direction. The very first step in their plan focuses on making peace with your past by estimating every single dollar you’ve ever brought in. Yes, going back to your lawnmowing job when you were still wet behind the ears. Once you see this pile of money, then calculate the complete worth of all of your assets, minus what you still owe on them. The result can be startling, and it often reveals many truths about your relationship with money.
Once you’ve done this and it’s clear how large of a portion of your income that you’ve wasted (often over 100%… just think about that!), the second step encourages you to figure out your true hourly wage. Basically, just take your current hourly wage and use it to figure up how much you make in a given period (a week works well for this). Then, add in the extra hours you burn traveling to work and doing other work-related events, then subtract out the money you spent on these extra elements, including wear and tear on the car, the cost of eating lunch out with others, and the cost of entertaining. The result is often an amazingly low true hourly wage; each hour at work, this is all you’re really making.
The third step is more traditional, at least at first: record every bit of income you make and every single thing you spend money on. Your Money or Your Life encourages doing this for several months to make it routine, but the first month can often illustrate many truths, mostly because of the additional step. Once you’ve listed all of your expenses, then figure out, using your “real” hourly wage in step two, exactly how many hours you had to work in order to afford this expense.
I’ll use myself as an example. Although I believed I was doing really well, I calculated my own true hourly wage as being about $7 an hour. I could literally work at the gas station across the street for that wage! When I started comparing this to some of my regular costs, the amount of time I was working to get various material items was kind of scary. My new laptop would require almost 200 hours of work just to cover the cost of owning it, let alone the electricity and internet bill.
Tomorrow, we’ll continue the review by examining the next three steps in the process.
Your Money or Your Life is the sixth of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.