Matt of Steadfast Finances wrote an excellent post recently on visualizing on the things you own end up owning you. He calculated how much he earned per hour and then mapped out the costs of his mortgage and other expenses on a calendar to figure out how many days he was working for each thing. I suggest checking it out.

If I were the one titling the post, I would have called it “Visualizing How Things You Don’t Yet Own End Up Owning You.” After all, a great deal of that was debt, even if some of it was “good” debt like mortgages and car payments. Once you’ve actually paid for something, it shouldn’t be eating into your monthly spending unless it requires periodic maintenance.

Calculating your Real Hourly Wage and making charts, calendars, and other visual aids can make your spending habits tangible in ways that just looking at the numbers in a budget may not do.

Calculating Real Hourly Wage

If you’ve already done this calculation, then just skip ahead. Calculating your real hourly wage for these purposes isn’t too hard. We’re going to use a basic method, but I’ll mention a few other ways you can calculate it even more thoroughly.

The simple method for calculating your real hourly wage is to take your take-home pay (as shown on your paystub or deposited into your account) and divide it by the number of hours worked. That takes care of taxes, money going towards retirement, health insurance, and anything else you get taken out of your paycheck.

For a bi-weekly paycheck, divide it by 10 to get the daily wage and by 80 to get the hourly wage, unless you’re working more hours.

You can come up with an even more precise hourly wage by calculating the cost of working. What do you pay to commute? How much more do you pay for lunch on workdays? What costs do you have only because of your job?

This figure comes in handy deciding whether to take or keep a job. However for our purposes today I think the simple method is sufficient. Transportation, food, and other work expenses should simply be added to the pie/calendar calculations.

Using Real Hourly Wage to Evaluate Purchases

Besides seeing where your money is already going, you can use the real hourly wage as a way to evaluate purchases (and here it can be even more helpful to take into account the other costs of work too). Time and time again I’ve kept myself from frittering away what spending money I have by reminding myself how many hours of work it’d cost.

This method works best with things that, deep down, I know I won’t really use but that in the moment I’m desiring strongly. Recently I saw a beautiful pendant on etsy (since sold). It cost $40. My first thought was “Shiney, want!!” But then, reminding myself that the only jewelry I wear 99% of the time is my wedding ring, I asked myself whether I’d be willing to go into work and to my job for several hours in order to earn enough to buy it. Truth was, I didn’t want it that much.

If you’re considering going into debt for an item, especially long-term debt, the calendar-charting method is even more useful to show just how much of an effect it will have on your finances. In Matt’s case, his mortgage has taken over the first two weeks of the month. Of course, his rent may have occupied much of the same space before. But deciding to buy a replacement car when your old, paid-off, one is still working means deciding to give up several days of earnings every month for years in order to own that car.

Some things are worth saving up for anyway because you know the pleasure you can get from them greatly exceeds the cost. When I was 16, I saved up and bought a $2000 violin. I was making about $6.50/hour at my library job. With $500 coming from a Sweet Sixteen gift by my grandfather, I had to come up with $1500 on my own. Before taxes, that represents 11 weeks of work (20 hours/week). I can’t recall what I earned after taxes, but I’m sure it was closer to 15 weeks of work, over 3 months. It was worth it.

Charting Real Hourly Wage to Change Your Budget

Even if you’re not in debt, constructing a chart like Matt did for his spending helps you evaluate where your hard work is ending up. Some programs such as You Need a Budget and Quicken will show you charts and graphs based on your spending habits.

An item for $200 in dining out a month is 1.25 days of work if your real hourly wage is $20/hour. If you’re only earning $15/hour (even if you’re making $20/hour), then it’s a little over 1.6 days of work.

Just because you chart it doesn’t mean you have to change it. If it’s not running you into debt, if you can achieve your other goals, and if you’re comfortable knowing how many hours of your life you have to work every month in order to dine out, then you can cross it off the list and continue. But it can also be an eye-opener to see how many hours you’re spending working towards something which you really don’t want enough compared to the time you’re putting in.

If you don’t yet have a budget, check out my free [download#13#nohits].

How Real Hourly Wage Applies to Freelancing

For freelancers, the real hourly wage computes a little differently. First, you have to divide the money you’re earning by all the time you spend working, not just the time you spent earning it.

So if you’re charging $40/hour and you spent 5 hours of one day working on client projects and 3 hours pitching, following up on leads, looking for work, etc, then you have to divide the $200 (after tax) by 8 hours to start computing a true hourly wage. If you spend 10 hours/day working and work 6 days a week, then you’ll need to divide your earnings by a 60/hour work week. And if you’re working that sort of schedule, your spending calendar should reflect that too.

Don’t forget to take into account all the things that come out of an average paycheck–taxes, health care, etc. You don’t have to subtract them, but you have to chart them somehow or other. If you want to, block out how many days of your month go towards paying taxes, how many go towards health care, etc.

When your monthly paycheck is never a guaranteed amount, it’s even more important to evaluate spending decisions and figure out how much of your life you want to put towards any purchase or monthly commitment.


Funny about Money January 25, 2010 at 10:11 am

Interesting post. 😉 Sometimes I feel like this is something I don’t wanna know about!

Seriously, though: When you’re freelancing, IMHO you do need to subtract the cost of overhead to arrive at the real hourly in-your-pocket wage. This includes such things as taxes, health insurance, the cost of buying and operating your computer equipment, office supplies, the cost of gasoline and wear & tear on your car, telephone service, and the prorated cost of heating and cooling your work space. The calculation is complicated by the fact that some of these are deductible.

Really, the main reason we should add all this stuff up and figure out how much it costs on an hourly basis is that it helps the independent worker to calculate a realistic fee. You can’t fully appreciate how much you need to charge clients until you know not only what it costs you to live but also what it costs you to do business.
.-= Funny about Money´s last blog ..Financial Freedom: Work =-.

Ken January 25, 2010 at 4:19 pm

Interesting idea. I think I read something similar to this in Your Money or Your Life, Joel Dominguez. I think my gas costs (commuting) would be a humbling calculation.

Katie January 26, 2010 at 9:01 am

Visualizing my hourly wage was what kept my spending in check as a teenager. To my friends it was a $50 shirt, but to me it was an 8 hour shift shirt. Mr does the same thing, but he calculates it in terms of overtime.
.-= Katie´s last blog ..Being an Idiot on Facebook Can Cost You =-.

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