31 Days to Financial Independence (Day 5): A Living Budget

“31 Days to Financial Independence” is an ongoing series that appears every Thursday on The Simple Dollar. You might want to start this series from the beginning!

Last time, we went in a bit of a different direction and spent some time discussing our “true hourly wage.” As a quick refresher, a person’s “true hourly wage” is the amount they actually get to keep in their pocket per hour of time devoted to work.

Before that, we took an extensive look at our lives: how we’re stretched way too thin in terms of both time and money and how to use a basic principle of frugality to start changing direction by figuring out the handful of things that really matter and focusing on them while going minimal on the rest.

Today, we’re going to bring those two points together to build a new kind of budget, one that goes beyond a dry listing of dollars and cents and reveals some real hard truths about your life. This will set the stage for a lot of specific financial changes in your life, which is what the rest of the series focuses on.

We’re starting with the big picture so that we understand why we’re doing all of the specific things.

This big picture is, yes, a budget of sorts. Countless personal finance books recommend that you create a budget for you and your family, but they often don’t really explain what’s meaningful about it. It tends to just be a framework to juggle spending around a little bit so that the dollars and cents add up.

I don’t know about you, but I don’t really find that useful or life-changing at all.

For me, what’s meaningful is the time and energy I spend in my life. I work a lot of hours in a given week when I add together the time I spend writing, the time I spend doing projects and researching articles, the time I spend reading new personal finance books and article and taking notes, the time I spend on media interviews, the time I spend on emails … all of that is time I could be spending on other things in my life, other things that are probably more meaningful for me.

It’s worth saying here that a great life is one where you spend as much time as possible on meaningful things.

So, for me, I feel far better about my working hours when I know that a lot of those hours are generating the money I need to have the meaningful life I want. Perhaps that time will be spent earning money that will pay for something that I really care about, like saving for a big hiking trip (Yellowstone, next summer, it’s happening).

On the other hand, perhaps that time spent is being used to earn money that’s simply going toward accelerated retirement savings so that I can actually step away from work responsibilities earlier in life and devote tons of time to my other meaningful life goals.

The point of all of this is to simultaneously add more meaning to my work while also realizing how much of my time is actually spent just “spinning the wheels.”

“Spinning the wheels”?

Here’s the truth: you spend a significant portion of your working hours earning money that’s spent solely to maintain your life so that you can, well, work more hours. Unless you derive a significant amount of life value from your work, that’s a pretty depressing cycle. It’s not really meaningfully connected to any of your core values. You just work to buy the minimal things you need to go work more.

When I was at a point in my life where almost all of my hours devoted to working didn’t really build up any of my long-term goals, it felt really empty. I was honestly working just so I could afford to work some more with just a few short term pleasures to take the edge off of things. The depressing part? Three quarters of Americans do this exact thing – they live paycheck-to-paycheck. They simply work so that they can feed themselves, clothe themselves, and then make it to work next week, with just a few pleasures to make it all tolerable.

That’s not a life I want to live. That’s not a life you want to live.

For me, everything improves when you start shifting that around. When you start reducing the number of hours you spend working just to “spin the wheels” and start increasing the number of hours you spend working in order to achieve the things you want most from your life, work becomes more tolerable and even enjoyable.

The fact that I can spend whole workdays knowing that I’m working so that I can retire earlier or so that I can spend several days hiking at Yellowstone next summer makes that workday feel invigorating. It also makes me want to figure out ways to make more and more and more of my working hours work for me in that way.

So, where do we start?

The best way to start, in my opinion, is to build a “true hourly” budget. It’s a look at how you “spend” the hours you devote to work and what you really get out of them. It’s similar to how you would normally build a budget – you list some categories and figure out how much you spend in each of them – but then you convert that to hours spent devoted to work by dividing each category by your true hourly wage. In other words, you end up budgeting your working hours instead of your dollars.

Why do things this way? What’s the benefit? For me, this kind of budget is far more inspirational than a dollars and cents budget. I get to clearly see where the hours I spend on work tasks are really going and I’m really inspired to have more and more of my work hours go toward meaningful things. I want my work to be as meaningful as possible and when the proceeds from that work go to forgettable things, that’s … well, that’s not meaningful.

In other words, this budget is simultaneously useful and meaningful. It’s useful in that it can identify areas in my life where I’m overspending (both in terms of money and hours) and it’s meaningful because it pushes me toward trying to find ways to give more of my working time to the most meaningful areas of my life.

Let’s walk through how to do this.

Exercise #5: Building Your True Hourly Budget

This step relies heavily on the things you’ve done in previous steps, so let’s get started by gathering those up.

You’ll need your true hourly wage as well as the estimate of hours devoted to work that you figured up while working on your true hourly wage.

You’ll also want your list of meaningful areas of your life (or goals, depending on how you develop them).

So, take out a piece of paper and make three columns on it. (Another option is to use a spreadsheet; if you’re comfortable with Excel or another such program, it will work wonderfully for this exercise.) One column will list each of those meaningful areas of your life. The second column will be spent hours, so write “spent hours” up there. The third column will be dollars and cents, so just put a big dollar sign up there.

Now, here’s the thing: you know exactly how to convert back and forth between those columns. You know your true hourly wage – that’s exactly how much an hour of your life is worth.

In the first column, as the very first entry, write WORK in big capital letters. Then, in the hours column, write down your estimate of hours in a month that you spend at work (take your weekly estimate and multiply it by four). Then, in the money column, take your true hourly wage and multiply it by the number of hours you work in a month.

So, let’s say my true hourly wage is $10 and I calculate that I spend 60 hours per week on work-related tasks. In that case, the “hours” column would have 240 in it (60 hours in a week times 4 weeks in a month) and the “money” column would have $2,400 in it.

There’s the start of your monthly budget.

The first thing you’re going to do is add all of the pieces of a typical household budget to the first column. Here’s a list of the things you should include

Housing
Transportation
Utilities
Food
Insurance
Healthcare
Entertainment
Donations
Clothing
Education
Hobbies
Vices
Debt Payments

Under this, write “Subtotal” and draw a big line across the page under that.

Under that, write your list of meaningful areas of your life.

Under that, write a line across the page and then beneath that line, write “Total.” Ideally, at the end of this, your total will be zero.

Now, take out your last few months of bank statements and credit card statements and use them to make your best estimate for each of the budget categories you have listed. Try to fit every single expense on your bills into one of those categories, but if you have to create a new one, do so. How much do you really spend on food in a month? Write that in the $ column across from “Food.” How much do you really spend on housing – your mortgage payment or your rent and any home maintenance costs? Write that in the $ column across from “Housing.” You get the idea.

What if I’m married? There are two ways to go here. One way is to figure your spouse’s true hourly wage, then combine the numbers together (multiply each person’s true hourly wage by the hours they spent on work, then add the total dollars and total dollars together, then divide the combined dollars by the combined hours to get your “shared” true hourly wage). Another is to keep them separate and just use the items that you’re financially responsible for.

Once you’ve done that with all of the actual dollars and cents budget areas, convert all of those dollar amounts to hours by dividing them by your true hourly wage. So, let’s say your true hourly wage is $10 per hour and your housing is $800 per month. You divide $800 by $10 and you end up with 80 hours. In other words, you devote 80 hours per month to your job just to keep your roof over your head.

Once you’ve done this with each category, it’s time to subtotal things. Take your total number of hours listed right at the top and then start subtracting the hours from each category from that. If your total is, say, 240 hours and you figure your housing is eating 80 of those hours, take 240 and subtract 80 from it. Then, from that total, subtract the hour amount for each other entry on the list. (I prefer to do this type of thing in a spreadsheet program like Excel, as I noted earlier.)

Soon, you’ll have your subtotal of hours. That’s the number of hours you have remaining in your life for those life goals. It will probably be a surprisingly small number. (You can do the same thing with the dollars column if you’d like.)

Now, stop here and look at this picture of your life. Right now, you’re devoting the vast majority of your working hours to all of those budget categories. The hours of your life are drained away by the cost of your home/apartment, your car, your vices, entertainment, your hobbies.

In the end, you’re left with very little for the things that you claim really matter to you the most. For example, you might be devoting 240 hours per month to work, but only 10 hours of that effort are actually spent on the big goals in your life.

Think about all that you go through in a typical workweek. Think of how many of those hours are spent to afford each of the things above – your housing, your meals, your cable subscription, your vices, and so on. Then, think about how little is left for the big goals.

Is this how you want to be spending your life?

Do you want to be devoting hour after endless hour to watch almost all of it get sucked up by forgettable things, by simply keeping the wheels turning so that you can do it all again next week?

Or do you want to be devoting as much as possible to the truly important areas in your life, the things that make your heart sing with joy?

In my mind, financial success is all about moving the hours from the ordinary budget items down to those key goals in my life. Whenever I can make a change in my life so that I can cut back on those ordinary budget areas, I can then devote those hours to the key areas in my life that I care the most about.

That takes three forms. One, obviously, is frugality: how do you trim the hours devoted to those ordinary budgetary areas. The second is to work more: how do you add more hours to the total amount spent working each month? The final one is to become more efficient with your work: how do you earn more per hour of work?

The rest of this series is going to focus on those things.

Many of the entries are going to talk about how to effectively cut back in each budget area. Remember, the goal is to cut back very hard on areas that aren’t truly important to you and that the proceeds from every cut is going to be devoted to your big toals.

Later on, we’ll talk more about how to increase your hourly wage and also how to smartly increase your hours a little bit, too.

The goal, in the end, is to maximize the number of hours per week you work for your big goals and minimize the number of hours per week you work just to keep the wheels running. In other words, your goal is to work as much as possible for the life you want to live and work as little as possible for the life you have now.

Ready to get started? Next time, we’ll talk about the first life-changing step.

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