This eye-opening exercise from Stacy Johnson, author of Life or Debt 2010, is guaranteed to reduce excess spending as you discover your true income and how much the stuff you own really cost you.
If you are making 20 bucks an hour, you’re actually probably making even less than $14. Because, in addition to taxes, there are all kinds of other costs associated with showing up to get that $14 every hour. You’ve probably got to drive there, which costs you money. And, unless you work at a nudist camp, you’ve also got to show up with suitable clothes on, clothes that you might have to pay to have dry-cleaned. You might be eating out for lunch, which obviously costs more than if you were eating at home. And if your job stresses you out because it’s not providing you with fulfillment, you probably also spend money doing things to alleviate that stress, like having the occasional cocktail or two at after-work “bitch sessions” with your buddies, or taking vacations, or indulging in other leisure activities that reflect what you really like doing. It all adds up, and when you take the time to add it up, what you’re going to find is that you’re making a lot less money than you thought and you’re using way too much of your precious time to do it!
So here’s an exercise I want you to do. Unless you’re smarter than I am (a distinct possibility), you’re probably going to need a calculator to do this, so have one handy before you start.
1. Write down your annual salary, or if you’re hourly, about how much money you make every year. __________
2. Multiply the number above by 0.7 (to account for taxes) and write the answer here. __________ (Special note to those who are sticklers for detail: I realize that our tax system is incremental. In other words, if you’re in a 30 percent tax bracket, not all of your income is taxed at 30 percent; only the part that exceeds established boundaries is. But it’s also true that federal income tax is the tip of the iceberg. You pay 6.2 percent of your income in Social Security tax. You pay 1.45 percent in Medicare tax. You pay up to 6 percent in federal unemployment on part of your income. Depending on where you live, you may also be paying state and local income taxes, as well as state unemployment and worker’s compensation. So, all in all, I’m perfectly comfortable with this 30 percent figure.)
3. Take a few minutes to think about all the expenses that are associated with your job every year (gas, food, clothing, etc.). When you’ve got a rough idea, subtract that number from the answer you got in number 2 and write that amount here. __________
4. Divide the number above by 2,000 (the number of hours the average person gets paid to work every year) and write that answer here. __________ This is your true hourly wage.
What you now have in front of you is how much you’re really making every time you trade an hour of your life for that paycheck. Depressed? Well, grab a hankie, because it’s about to get a lot worse!
5. Now, take a few minutes off while you look around your house. Estimate the price of all the useless “stuff” you’ve accumulated over the years. I’m talking about stuff you thought you wanted at the time but in fact don’t really use that often, as opposed to the things you really like or really need. When you get a rough estimate, write that amount here. __________
6. Take the amount in number 5 above and multiply it by 7 to calculate its 20-year opportunity cost. Write that answer here. __________
7. Divide the number from number 6 by your “true” hourly wage. (It’s the number from 4.) Write that answer here. __________
If you actually went through this exercise, what you’ve just uncovered is the number of hours of slave labor, hours you can never replace, that went into surrounding yourself with this stuff you didn’t really want or need. And keep in mind that this is if you paid cash for everything! If you used credit, the final tally is obviously much worse. Feel like going to the mall?
ABOUT THE AUTHOR
Stacy W. Johnson, author of Life or Debt 2010: A New Path to Financial Freedom (Copyright © 2009 by Stacy Johnson), is a CPA and former stockbroker who for nearly 20 years has been the producer and host of the popular syndicated personal finance new series Money Talks. He is the recipient of multiple Emmy awards. Check out his website at moneytalksnews.com.
MORE ARTICLES BY THE AUTHOR
- 3 Ways to Reclaim Your Wallet and Start Saving
- 5 Steps to Redefining and Achieving Financial Freedom
- 33 No-Nonsense Ways to Save Money by Saving Energy
- Read Chapter 1 of Life or Debt 2010: A New Path to Financial Freedom
- Watch the video: The author describes his program for helping you get out of debt and achieve financial freedom