I like to think of money in terms of the amount of time it takes me to earn.
When you need to make a consumption, and I mean need to. I tend not to go shopping for the hell of shopping. I can prove this as I commonly wear clothes that I have had for more than a decade. And only really replacing them when they physically wear out.
Firstly, when I want to buy something, I tend to do a lot of research on the item I will purchase. Is it the right one, are there other brands that are just as good but are cheaper? Do I really need it? Are there other items I already own that will do the same task? And finally how much does it cost?
The last one, how much is it going to cost, is the important one.
When you think of the price, it is not just the dollar amount you should be thinking about. If this is the only thing that you think about you are in a lot of trouble. But I suspect that most people don’t tend to think this way even if they don’t know it.
The other things you think about, besides the dollar figure, is things like do I actually have the money to make the purchase. And if you don’t, you might find yourself thinking about how much money you have on your credit card, or how much a load would cost.
The first alarm bell should go off if you want to make a purchase and use personal loans or credit cards.
There is nothing inherently wrong with credit cards; I use mine all the time! But I pay mine off religiously. Even bringing the balance to 0 on a weekly bases. I know that I have 40 odd days of interest-free period and all that. I would rather pay it off, so the money in my accounts is the money that I actually have.
If you are getting a loan to buy something, it would definitely have to be a life or death sort of item you intend to buy. Otherwise, save up the money to buy it outright. If you get a loan to pay for something, you will pay far more than the product is worth the right to own it.
This is an example of exponential growth working against you, just like your mortgage. Just don’t do it.
Once you foster the discipline to save for an item, it becomes more rewarding when you actually buy the item outright, more often than not when you go to buy the item you would have changed your mind and don’t want to buy it.
You see, when you learn how long it takes to save for something, you appreciate the true costs of items. When you buy items using loans and credit cards, you don’t learn how long you have to save for before you can buy an item, because you will already own the item.
The fact that you change your mind is normally related to realising how long it took to save that amount of money.
And this is the point that I want to hit home.
Money is inherently related to time.
Now, this is why I am on a mission to create passive income. To separate money and time forever. I don’t want to be trading my time for money forever!
But, before you get to the stage of having enough passive income not to have to work if you don’t want to. You are more likely than not trading time for money. Be it working for yourself or being employed by a business. Whatever you do, you are trading time for money when it comes down to the basics.
So money is tied to time.
You probably work for an hourly rate, say $20 per hour, or whatever you earn. You might think that the new TV you want to buy, which cost $2000 (quite an expensive purchase if you ask me) will take you 100 hours to earn.
You might think, wow, that is only about two-week.
First, that $20 per hour gets income tax taken off it. What is your hourly income after-tax then? At $20 per hour, 50 hours per week, you will earn $52k. Not bad! Once the tax has been paid, you will be left with $43,380. Still, a nice amount of money to live on, you think.
In this hypothetical situation, your true hourly rate will be $16.70. That is this is the money you earn in hand after tax. So, that $2k TV you want to purchase will now take 120 hours to earn—around 2 and a half weeks.
You might think you can justify the TV price and divide it by your hourly take-home rate. I’m afraid that’s not right. You will always have expenses like rent, power, internet, phone, and food. You can’t forget the food!
Of course, you will have a budget, and know how much all these things are likely to cost. But let’s continue with the hypothetical situation.
Your weekly phone bill comes to around $7.50, and the internet is another $22.50 per week. Power may be around $25 per week. Food might come to around $200 per week for your family. Food is expensive here in NZ., and finally, you have found a cheap place to rent coming in at $260 per week.
After paying all these expenses, you are left with $320 per week of “extra” money.
So your real hourly rate is $320, the money left over after expenses, divided by the hours you work, of which there are 50. Your hourly rate will then be $6.40. This is your true hourly rate
How much will your TV cost in time then?
Just divide $2k by 6.40, which becomes 313 hours, or a bit over 6 weeks to save for if you don’t spend that money on anything else when you know exactly your true hourly rate. You will look at purchases completely differently. Knowing exactly how long you will need to go to work to pay off items. I would encourage everyone to sit down and work out their true hourly rate. This will give you a better sense of the value of your money. And how hard it is to earn and how easy it is to spend.