It’s cool when readers make comments that prompt you to create a post on a certain point, no matter how brief. Recently, on my post 5 Rules for Achieving Debt-Free Living, a simple yet valuable point was made in one of the comments:
“Look at what you want and figure out how many hours (post-tax!) you will have to work to earn it. Do you want it badly enough to buy it?”
It’s something I have thought about before. These days, I think in terms of maximizing the income minus expense gap, investing intelligently, and the concept of time is money. This approach is one I actively thought about as a teenager, when I realized that for me to spend $9 to see a 2.5 hour movie and enjoy popcorn and a soda, it would take me that long at work just to do that. It got me thinking about how maybe I didn’t need to get the popcorn and soda, and maybe should just get one or the other:)
But as adults, it helps to remember that calculation from back in the day. I had a few friends who, upon getting their first jobs out of undergrad studies, purchased new cars. Not just new cars, but nice new cars. This was a while ago, and these people were buying $25,000 cars. Keep in mind, their salaries were in the range of $25,000 as well. Pre-tax.
These guys spent a lot of time working just for a car.
So, let’s do the math.
- $25,000 salary, divided by 250 working days, = $100 per day.
- $100 per day, divided by 8 hours, = $12.50 per hour.
- $12.50 per hour, multiplied by 75% - to account for tax – = $9.38 per hour post-tax
- $25,000 car, divided by $9.38 hourly rate, = 2,665 hours.
They worked 2,665 hours for those cars. When you consider that the calculation above assumes 2,000 working hours per year (when you consider #1 and #2 above), this comes out to 1.33 years of their life that they worked just to pay off a car.
If they just would have purchased a decent used car for much less, it would have made a lot more sense, though it wouldn’t have been “cool”.
The good news is that many years later, both guys are now savers who try to put a way a solid percentage of their income. I have only talked to one about the cars he bought when younger, and he acknowledges that it was totally nuts for him to do that.
Maybe he started to do this type of math exercise and figured it out later!
Question for You: Do you ever think of things in this way, figuring out how much you would have to work in order to pay for something you wish to purchase? This can apply to any big purchases, not just cars.