Penny Pinching Tip
Here’s a great budgeting tip …
If you’ve been through a tough financial time, I’m sure you’ve renewed your commitments to creating budgets. You probably take a second look at price tags. You ask yourself things like:
Is an espresso really worth $4?
Wouldn’t it be smarter to rent a movie than spend $25 at the theater?
Should I buy a new pair of running shoes for $90, or can I make do with my old pair?
These are good questions to ask, but instead of looking solely at price tags, let’s also start considering this question:
How much is my time worth and how many hours will I have to work to pay for an item?
I call this association between how much your time is worth and how many hours or days you will need to pay for the item the “Hour Factor.” Figuring out your “Hour Factor” by asking a series of questions is critical in helping a person get a budget under control.
I created the Hour Factor after I wrote 7 Steps to a 720 Credit Score because I began to realize that creating a budget wasn’t enough for people who struggled to stop spending money. Instead, they have to develop an entirely new mindset that guides them when making a buying decision.
For instance, imagine that you are considering buying a $250 gadget. To determine the item’s Hour Factor, start by asking: How much is my time worth?
An attorney might make $250 after taxes. A minimum-wage worker who does not pay taxes might make $7.25.
Next ask: How many hours will this item cost me?
The gadget will cost the attorney one hour; the minimum-wage worker will pay thirty-eight hours for the same gadget.
Is the latest gadget worth thirty-eight hours? If you cannot afford your insurance premium, is it worth even one hour?
Only you can answer this question. They trick is twofold: First, begin associating purchases with the amount of time you must work to secure them. Next, consider the opportunity cost associated with each purchase.
The Hour Factor process works like this:
* Answer the question: How much is my time worth? Determine this as an after-tax figure. If you are paid hourly, this calculation is simple: divide your take-home pay check by the number of hours you worked in that pay period. If you are paid a salary, divided your annual after-tax income by 2080 (the number of hours a full-time employee works in one year, assuming a two-week vacation).
* Relate all spending to your hourly wage. For instance, let’s assume your hourly wage is about $16.50. If you are going to buy the latest $200 cell phone, divide its cost by your hourly wage to determine the Hour Factor. Ask yourself these questions: How much is my time worth? Is this cell phone worth twelve hours of my time? “
* You must also know your weekly “disposable” hours. Let`s say, for instance, that your weekly expenses cost you twenty hours, meaning you have an additional twenty hours to “dispose” of. When we put this in terms of time, you can begin to see that you are “disposing” of one about hour of your life when you treat your friends to $15 of coffee drinks. You are disposing of five hours of your life when you splurge on a lavish meal complete with appetizers, dessert, and drinks.
* Finally, consider the opportunity cost for each of your purchases by asking these questions:
1. What else could I buy with ___ hours of my time? Twelve hours could be directed toward health insurance, a car payment, a retirement account, or your child’s college tuition. When asking, “What is my time worth?,” you begin to see that twelve hours of your time might be worth a car payment, but it certainly isn’t worth a new pair of shiny shoes if you cannot afford your car payment otherwise.
2. What investment and savings opportunities am I losing by disposing of these hours? Consider, for instance, that your goal is to purchase a home. You know that you must save $60,000 for the down payment on a $300,000 home. Assuming you make $16.50 hourly and you have twenty “disposable” hours each week (that is, once you have paid for all necessities, you have twenty hours left over for savings, impulse shopping, entertainment, or whatever else you choose to buy), you must save about 3,640 hours to afford the down payment. If you saved each of your disposable hours, you could afford the down payment in about three and one-half years.
Or, you can buy that cell phone, take a lavish vacation, and splurge on expensive dinners. Only you can decide what your time is worth.