Using Your True Hourly Discretionary Income to Make Smarter Purchases

One of my favorite personal finance ideas is the true hourly wage.

Your true hourly wage is an easy concept to understand. Basically, you add up all of the hours you either work or devote to work-related tasks in a year (this includes things like your commute or working at home), then you add up all extra expenses that you incur due to work in a year (taxes, clothing, commuting costs, fuel, and so on). Take your annual salary, subtract all of the extra work-related expenses, and then divide that resulting number by the total number of hours devoted to work, and you get your true hourly wage.

So, for example, let’s say I make $50,000 a year. I work 40 hours a week for 50 weeks a year, but I have to spend one hour commuting each day, I spend about 10 hours a month working at home, I spend about five hours a month at work related dinners, and I spend another 30 hours a month traveling. That adds up to 2,740 hours in a year.

At the same time, I pay about $8,000 in income taxes, about $5,000 in fuel costs and car depreciation, and about $3,000 in travel costs and entertaining people and going out for meals. So, my total income that I actually keep is $34,000.

If I just divide $50,000 by the 2,000 hours I’m actually at work, my hourly wage is $25. However, if I divide my real income of $34,000 by the 2,740 hours I actually devote to my job, my true hourly wage is $12.41.

I like to use the true hourly wage to consider non-essential purchases. If I want to buy a new $50 board game, that means that I’m spending four hours devoted to work. If I want to go on a $2,000 trip, I have to spend 161 hours on work or work-related tasks.

The thing to remember is that this is basically tacking those extra hours on the end of my career. By spending that money on something on the spur of the moment for fun, I’m taking money away from retirement savings right now, and that lost savings means that I’m working longer hours later in life. That trip isn’t just 161 hours of work now, it’s 161 hours of work when I’m older and want to hang things up.

It starts to really put those things in perspective.

However, after a recent conversation with a reader, it’s clear to me that a person’s “true hourly wage” might not be powerful enough.

Seth made the brilliant point that there are some fundamental life costs that we simply can’t avoid. You have to have some level of housing. You have to eat. You have to have electricity. Depending on your situation, you might need a car.

Seth’s point was that you should subtract those fundamental life costs from your true hourly wage, because you use the true hourly wage to evaluate unnecessary expenses. After all, you don’t spend the rent or the mortgage payment on unnecessary things.

So, for example, let’s say that the person described above spends $400 on basic food needs, $1,000 in rent, and $300 in utilities per month. That adds up to $20,400 a year. If you subtract that out of the $34,000 left after taxes and work expenses, that leaves you with $13,600. Taking that number and dividing it by the 2,740 hours devoted to work per year, that leaves a person with $4.96 per hour of time devoted to work.

That $50 board game? That’ll take about 10 and a half hours of work. That $2,000 trip? 403 hours of work. Even something like a $5 cup of coffee and a bagel requires more than an hour of work to come up with that much discretionary income.

Not only that, people often lock down a lot of their discretionary income. Got a cable or satellite subscription? That averages $100 a year, so for our example person, that’s about 21 hours of work to pay for it. Got a gym membership for $100 a month? 21 more hours of work. Do you go out to eat twice a week and spend $15 a pop? Over the course of a month, that’s 19 hours of work to earn that.

Lower our example person’s salary a little and their true hourly discretionary income drops quickly toward zero.

Much like true hourly wage, I find that true hourly discretionary income is a really powerful way to put expenses in perspective. It quickly makes it clear how much of your life’s energy is devoted to unnecessary expenses.

If your true hourly discretionary income is $4 an hour, then something that costs $20 basically devours five hours of your life. Is it really worth it?

For me, I find that knowing my true hourly discretionary income gives me a pretty powerful metric for determining if an item is worth buying or not. When I’m considering a non-essential item, I just think about how many hours I have to work in order to actually pay for that item, and then it typically goes right back on the shelf.

Let’s say my true hourly discretionary income is $6 (a reasonable estimate). I go to the bookstore and I’m eyeing a book that costs $15. If I buy it, that’s effectively two and a half hours of work just to have the book. On the other hand, if I go to the library and get the book, I save those two and a half hours.

The truth is I don’t want to invest lots of hours in my life working for something unless that something is really valuable or meaningful. Just getting a cup of coffee at Starbucks isn’t valuable or meaningful. Going to a coffee shop with a friend every once in a while, on the other hand, is a meaningful experience – it’s rare enough that it’s actually a treat and there’s social value to boot.

Just buying a book isn’t highly meaningful on its own. However, if I read a book from the library and I realize it’s something deeply special and meaningful, then buying it is likely a worthwhile experience.

The point is that true hourly discretionary income puts your purchases in perspective. You clearly see how much of your life energy you’re trading for various things and you begin to see that it’s not really a great tradeoff.

How can you calculate your own true hourly discretionary income? Here’s how you do it.

First, figure out how many hours you work during a given year. You don’t have to be perfect, just make a good estimate.

To that number, add in how many hours you commute each year. How long does it take to get to work? Double it, then multiply that by the number of days you work each year.

You’ll want to also add in things like time spent working at home, time spent traveling, time spent doing things like entertaining clients, and so on.

Now, turn to your salary. How much do you make in a year?

Subtract from that every single required expense. This doesn’t just mean your costs for taxes and for commuting. It also includes things like work clothing, basic personal clothing, basic food and water, rent, basic utilities (like electricity), store brand household supplies, and so on. Include just the costs that are the minimal expense to get through life and keep working.

This will take a while. Think about all of your expenses and ask yourself whether they’re required to maintain a basic existence and keep your job. (A nice side effect of this is that it will often unveil areas of your life where you could cut back.)

Total up all of those expenses over the course of a year and subtract that total from your salary. That’s your annual discretionary income.

Then, divide that annual discretionary income by the number of hours devoted to work-related tasks in a year. That’s your true hourly discretionary wage. That’s how much discretionary income you get for each hour you devote to work or a work-related task.

Often, that number is shockingly small. It puts things like a cable bill or a night on the town into real perspective. Do you want to devote twenty or thirty hours of your life doing work tasks to this unnecessary thing?

Sure, sometimes you’ll want to, and you should sometimes. There are expenses in life that are worth those hours.

However, there are going to be a lot of things that you spend money on that really aren’t worth it. Those are expenses you should strongly consider cutting.

I often use my true hourly discretionary wage as a factor in deciding whether a particular expense is worth it. Usually, I find that I don’t really want to devote that much of my life to that expense and that makes it much easier to just say no to the more wasteful expenditures in my life.

Good luck!

Read more by Trent Hamm

Trent Hamm

Founder & Columnist

Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.