The next time you go to make a purchase, take a good look at the price tag. It’s not being honest with you. Sure, you can see how many dollar bills you’ll need to hand over. But that price tag is definitely not telling the whole story of how much that item will really cost you.
So how can you tell whether your purchase is not only worth your cash but also your time and life energy?
Crunch Some Numbers
The very best way to determine the value of a potential purchase is to run through some basic arithmetic. And, once you complete this exercise, you’ll have a hard number for exactly how much discretionary spending you can do for each hour of your work.
Let’s get started . . .
Step 1: Compute your monthly after-tax income.
For most people, this is the amount you receive from your job in the form of a paycheck. If you own your own business, this is the cut that you take home each month. Be sure to add in additional income streams if you have them — things like profits from a side hustle, investment dividends you retain, Social Security benefits, alimony and such.
Step 2: Calculate your bare-minimum cost of living.
The trick here is to separate your needs from your wants. Housing, food and clothing are all must-haves. And, while insurance can sometimes seem like a luxury, we put it squarely in the necessities column for the protection of your family. But even small luxuries — like an upgrade from no-frills denim to name-brand jeans — should be excluded from your baseline cost of existence.
Add up the monthly cost of each truly necessary expense to get your monthly cost of living.
Step 3: Compute your hourly rate for the “extras.”
Subtract your monthly cost of living from your monthly after-tax income. This amount represents the discretionary funds you have available to spend during an average month.
Divide that value by the hours you work (or for which you receive paid time off) during a month. For instance, if you work a standard full-time job, you’re paid for 40 hours a week, 52 weeks a year — that’s 2080 hours a year. Divide that by 12 to get your monthly hours worked — about 173.
So, if your discretionary funds each month total $1000, you can compute an hourly income for life’s extras as $2000 divided by 173 hours, which is $11.54 an hour.
The number above isn’t just the result of a good arithmetic exercise or a fun fact to know. That number you calculated — $11.54 an hour in our example — is a tool to measure the value of each and every discretionary item that you buy.
Suppose, for instance, you’ve got your eye on an awesome new video game that retails for $45. At $11.54/hour for discretionary spending, you’d have to work four hours just to pay for that game.
So ask yourself: Is it worth it to you? It the amount of time and life energy you’ll need to expend worth the value, happiness or usefulness of your potential purchase?
The answer is one that only you can give. Maybe you’re not willing to toil for four hours for a new toy. Or maybe the hours of gaming fun and online camaraderie are totally worth the cost.
Framing your purchases in terms of whether they’re actually worth your time and effort in working for them is an excellent idea for everything you buy. Is it worth it to buy organic over standard produce? To pay for private schooling over public? To redo your kitchen or buy the bigger house?
We’re not here to answer these questions for you. But we do want you to have crystal clear vision before you decide to buy. And, when you look at your purchases in terms of your life energy spent, clear vision is exactly what you get. You’re not just swiping a credit card or mindlessly spending cash you worked so hard to earn.
So, the next time you’re itching to buy something on your wishlist, run through this little exercise. You’ll ensure that you’re staying true to your financial goals and respecting the value of your money.
image credit: Bigstock/Morganka
Dr. Tony is the co-founder of MindShift.money and the best-selling author of three books on personal and business finances. Having achieved Financial Freedom at 27, Dr. Tony believes that through Financially Fit Bootcamp and Cash Flow Cure everyone can get there. He has made it his life’s mission to help others live a life where their money works for them—not the other way around.