Imagine the last time you were in a store staring at something you wanted to buy. You probably ran the cost through your head and compared it to the amount of money you had available to spend.
We all do it. After all, that’s how we were taught to know if we can afford something or not.
But stop for a minute and think. There might actually be a better way—a way that can help you sort out what’s really important for you versus what is just a temptation holding you back from reaching Financial Freedom. A way to calculate the true cost of a purchase.
Dollars Are Just A Currency
We’re paid in dollars. Dollars are a handy way to convert many different types of value into one, common tradeable substance. Without dollars, we’d still be bartering peas for chickens!
But when you’re working for money, you’re trading your time for dollars. We want to disrupt that connection with a Freedom Generator so you don’t have to trade time for dollars. But until you’re Financially Free, that’s how the game is played.
This is huge. Right now “dollars” are just a surrogate for your time.
Thinking about purchases in terms of dollars is deceptive. Because the true cost of an item is hidden: hours of your time.
Luckily, it’s not too difficult to reframe your thinking. All you need is a basic calculator.
How To Calculate The Cost Of One Hour Of Your Time
If you work a regular hourly-wage job, this number is easy to calculate: it’s just your hourly wage.
But even if you work on a per-project basis or in a salaried position, you’re still trading your time for dollars. It’s just that your “hourly wage” might vary. You can still calculate your “hourly wage” by tallying up the number of hours you work in a certain time period (say, a week or a month) and dividing it by how much money you made during that time frame.
For example, if you work 55 hours per week and bring home $1,237.50, your “hourly wage” is $22.50 ($1,237.50/55). If you got paid $500 for a project that took you 20 hours, your “hourly wage” is $25 ($500/20).
If you work on a per-project or salaried basis, and you’re not normally in the habit of tracking your time, now’s a good time to start. Toggl is a great, free time-tracking tool that provides you with customized reports.
How To Convert A Purchase’s Dollar Cost To Its True Cost
Now that you know what an hour of your time is worth, calculating the true cost of a purchase is simple. Just divide the item’s price by your hourly wage.
Let’s say you want to buy a $400 Roomba vacuuming robot. After all, you’re tired of vacuuming the floors all the time, right? If your hourly wage is $10 per hour, that Roomba will cost you 40 hours ($400/10) of your life. That’s an entire work week!
Thinking About The True Cost Of A Purchase Can Make You Spend Less
So the next time you’re about to pop an item into your cart, do the time-value calculation. Divide the price by your hourly wage to see what your purchase will cost you in terms of hours of your life.
Remember, you can never get back your time. If you make that purchase now, those are dollars spent that could have been used to build your Freedom Generator. Ask yourself: would you be willing to trade those hours of your life for this purchase rather than reaching Financial Freedom sooner?
Sometimes, the answer will be yes. You need food and shelter, after all, but you also need rest, fun and enjoyment in life. And the money that remains after you Pay Yourself First is yours to allocate as you choose based on how quickly you want to reach Financial Freedom. Still, you don’t always need every purchase you make.
A good example of this is when I used to work a job I hated. I hated it so much I left each day during the midday break to buy a $15 lunch. Then I did the time-value calculation. I only made $15 per hour, so eating lunch out every day was costing me one hour. It was like I was working the last hour of each day at the job I hated for free! That was when I started packing my lunches from home each day.
Doing this simple calculation can pull back the shades and show you what you’re really spending when you make a purchase. Knowing that number lets you more easily decide: is this purchase really worth it or not?
Community Question: Have you ever thought about the cost of a purchase in terms of hours of your life? Do you think taking this approach would change how much you buy? Let us know in the Financial Foundations Community!
The views and opinions expressed are those of the guest author and do not necessarily reflect the views and opinions of MindShift.money.
image credit: Bigstock/ismagilov
Lindsay VanSomeren is a personal finance writer living in Fort Collins, CO. She is a recent college graduate inspired to take charge of her finances after things didn’t go as planned in the Grownup World. Today her work appears on sites like Credit Karma, Magnify Money, and her own blog, Notorious D.E.B.T. In her spare time she enjoys reading, hiking, homebrewing and learning to play the guitar.