Calculating Your True Hourly Wage

       In discussing the net value of a second income, Amy brings up a useful technique that’s also discussed in Your Money or Your Life by Joe Dominguez and Vicki Robin. The idea is to calculate exactly how much money you’re making from your job after you account for all the related expenses. Divide that by the number of hours you spend working, getting ready for work, getting to work, and relaxing after work and you’ll have your real hourly wage.

       How much do you really make after you take out taxes, transportation costs, clothing, meals, the things you do to relax after a hard day at work, and all the things you pay others to do because you don’t have enough time? How many extra hours do you spend getting ready for work, driving through traffic, or watching TV to de-stress?

       This number is useful for two reasons. First, you’ll open your eyes to what you’re really bringing home from your job. Second, you can use this figure to decide if it’s worth it to pursue certain activities or to do things yourself instead of hiring someone.

What about Bob? (An Example)

       Let’s use a simple example to show how you’d do this calculation. Bob makes $18/hour working 40 hours a week at his job – making a total of $720 each week. First, we’ll take out taxes. His federal, state, and local taxes add up to about $110/week leaving him with $610/wk after taxes.

       Bob lives 10 miles from work and estimates he spends 2.5 hours driving every week and about $30/wk on gas & maintenance for his car. So now he’s down to $580/week for 42.5 hours spent.

       Bob doesn’t have to wear anything special for work, but he does have a tendency to eat out instead of bringing his lunch from home. Additionally, he usually ends up eating out for supper twice a week because he just doesn’t feel like cooking after getting home from work. His lunches and eating out cost him about $80/week. While he could eliminate those expenses now, Bob is honest with himself and admits he probably won’t do that as long as he’s still busy from work. This drops his net pay down to $500/week.

       Bob figures he must have at least an hour every evening in front of the TV just to relax after work. He could do something else if he didn’t feel so stressed out from work, so he adds 5 hours/week to his total bringing it to 47.5 hours. Additionally, Bob spends Friday and Saturday nights going out with his friends to get away from thinking about how much he hates his job. He figures this costs him about $40/week and 2.5 hours. (Now he’s at $460/week and 50 hours for those playing at home.)

       Finally, Bob pays about $20/week in services he buys because he doesn’t have enough time due to his job. These are things like home maintenance, simple car repairs and maintenance, and someone to mow his yard. So he’s down to $440/week for 50 hours of effort – or $8.80/hour. That’s less than half of what he “earns” at his job!

Your Own Situation

       Bob’s calculations aren’t going to work for you. But you can follow the same sort of process to figure out your real hourly wage. Carefully consider all the expenses and time attached to what you do to earn money but also try to be realistic. This can be an especially eye-opening exercise for two-income households with kids. If both parents work and you have to hire babysitters or pay for child care, you could easily be better off if one parent quits their job to stay home with the kids.

       Make sure the expenses you relate to your job will actually go away if you quit your job. If you’re not willing to do some of those things, that’s not going to change if you work less. This is especially true when thinking of the frugal activities you could pursue if you had more time. You have to be willing to actually do them or you’re not saving any money at all!

       Finally, don’t take my example of Bob too seriously. There are definitely things he could do to improve his real hourly wage by making some simple choices (like brown-bagging his lunch). But the point is that Bob’s job pushes him to do those things because of stress, time constraints, or whatever other reasons keep Bob from eliminating those extra expenses.

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       If you want some more good ideas on saving money from The Complete Tightwad Gazette, make sure you sign up for free updates from Provident Planning. I write on a wide variety of personal finance topics, so even if you’re not interested in frugality I’m sure you’ll find something useful here.

This article contains affiliate links. Read my ad policy here.

Related Articles at Provident Planning:

1. Do It Yourself: Why Your Time Is Not Worth As Much As You Think
2. Frugal Tips from The Complete Tightwad Gazette: Track Your Spending for 3 Months
3. Frugal Tips from The Complete Tightwad Gazette: Everything You Already Know
4. A Penny Saved Is Nearly Two Pennies Earned
5. 5 Questions to Ask when Hiring an Attorney

       I haven’t had the chance to read the entire book yet. I’ve only read the excerpts at Free Money Finance. So if you want a taste of what the book is like, check out these links:

• God’s Ownership
• Riches and Wisdom
• Taxes
• The Love of Money
• The Poverty Gospel
• The Prosperity Gospel
• The Tithe
• Treasure in Heaven
• Where to Give?

       I think what you’ll find as you read those excerpts is that Rob and I very much agree on the Bible’s message about personal finances. After reading those excerpts, I know Dollars & Doctrine would be well worth the money and the time spent reading it. You can also find a review of Dollars & Doctrine at Christian Personal Finance.

Limited Time Special Offer!

       Rob has a March Madness special going on now where he’s offering Dollars & Doctrine for half price. This offer is only available until April 10th. Rob also offered to send me a free copy of the book if three people buy the book and mention my name. So, if you’d like to get a copy of Dollars & Doctrine for half price and help me get a free copy as well here’s what to do:

1. When you’re checking out after purchasing the book, be sure to click the “Add special instructions to the seller link“.

 

2. Enter “providentplan.com” as your special instructions to the seller.

 

3. Be sure to use this link to get your copy of Dollars & Doctrine at half price.

       I’m confident you’ll be happy with the book. It’s clear to me from reading the excerpts on Free Money Finance that Rob has a heart for following God’s Word and glorifying Him through his finances. If you have read the book or end up buying a copy, let me know what you thought about it in the comments!


This article contains an affiliate offer (sort of – I get one free copy if three people buy the book and follow the instructions, but nothing else). Read my ad policy here.

Related Articles at Provident Planning:

1. Weekend Reading – 02/19/2010
2. Christian Personal Finance Blogs
3. Weekend Reading – 01/08/2010
4. Start Here
5. Weekend Reading – 02/26/2010

Everything You Already Know

       Amy makes a point of explaining that personal finance advice is a lot like dieting advice. It’s mostly just a bunch of stuff you already know. We all know that to lose weight we need to eat fewer calories than we burn. To save money and get ahead in our personal finances, we need to spend less money than we earn. They’re both simple, and you already know those things. I’m not providing some great insight when I tell you to spend less than you earn.

       But in personal finance advice, you’ll run into some strange ideas. I’m referring to the philosophy of “Don’t worry about being frugal and spending less. Just focus on earning more.” They’ll even go to the point of saying that frugality is stupid and a waste of time. But the problem is that this approach is one-sided and blind to the advantages of a combined approach.

       The equivalent in dieting advice would be saying “Don’t eat less, just exercise more.” How many health professionals do you hear giving that kind of advice? None! The best dieting advice is a combination of eating less and exercising more.

       In the same way, the best personal finance advice is a combination of spending less (frugality and smart choices) and earning more (diligent work, entrepreneurship, and smart investing). That’s what I aim to give you on Provident Planning – a balanced approach. Indeed, God’s Provident Plan is designed with this approach in mind. Contentment and hard work combining to yield generous giving.

       But Amy offers a second part to this analogy. When she joined Weight Watchers, she already knew how to lose weight. But she kept going to the meetings because of the support network they provided. In the same way, she hoped The Tightwad Gazette could serve as a support network for those looking to save money – confirming what they already know, providing some useful tips, and encouraging each other along.

       That’s my desire for Provident Planning as well. I want to create a community where we continue to learn about God’s desire for personal finances and encourage each other along our journey. Together, we can support each other as we seek to glorify God through our personal finances. You can help me with this effort by continuing to read and comment, and I will help by continuing to write what I hope are useful articles. You can help even more by contacting me with any feedback that can improve Provident Planning for everyone.

Sign Up for Free Updates!

       If you want some more good ideas on saving money from The Complete Tightwad Gazette, make sure you sign up for free updates from Provident Planning. I write on a wide variety of personal finance topics, so even if you’re not interested in frugality I’m sure you’ll find something useful here.

This article contains affiliate links. Read my ad policy here.

Related Articles at Provident Planning:

1. Frugal Tips from The Complete Tightwad Gazette: Track Your Spending for 3 Months
2. Weekend Reading – 11/13/09
3. How to Get Out of Debt: Step 3 – Create a Budget & Stick to It
4. Weekend Reading – 10/09/09
5. Weekend Reading – 09/04/09

       But when you get to their website, all you’ll find is one huge sales pitch for variable annuities – probably one of the worst choices you can make when it comes to retirement investments. Not only will you pay high expenses for the insurance side of things (the guarantee of income for life), you’ll pay high expenses on the investment side of things as well (the variable part of the annuity). Variable annuities, especially deferred variable annuities, are only suitable for a small number of people – and it’s not usually retirees (or those near retirement). Annuities can have a place in retirement planning but they’re not for everyone (which is what Prudential and other insurance companies would like you to think).

       The video you’ll find at Prudential’s Retirement Red Zone is not educational either. If you want to learn about annuities, you need to go somewhere else. They’re not something I’ve discussed yet on Provident Planning, but I’ll get to them eventually. Just know that there are some good reasons you probably shouldn’t be buying a variable annuity any time soon:

1. High Fees – The fees for most annuities are quite high, and this is even more true with variable annuities. Costs do matter, so it’s important to consider them when making investment choices.

 

2. Complexity – Each annuity comes with a prospectus, which is supposed to explain the product and costs to you, the buyer. But trying to read one of these documents is almost impossible. First, they’re HUGE. I downloaded a prospectus for one of Prudential’s annuities and it was 264 pages (8.5″ x 11″)! Second, they make up their own meanings for words so you must check their definitions, but even those can be difficult to parse out. And third, they’re not laid out in a way that’s easy to understand – even for financial professionals, much less the average consumer.

 

3. Better Options – Finally, there are better ways to secure guaranteed income in retirement than variable annuities. As I said before, I’ve not explored these options so far, but I will as time goes on. Just know that you really need to consult a trusted financial advisor before purchasing an annuity. Once you buy it you can’t change your mind. (You can switch to another annuity, but you generally can’t get your money back without huge penalties.) And when I say trusted financial advisor, I don’t mean your stock broker or insurance agent. You need to find someone who is held to a fiduciary standard – which means they are legally required to put your best interests first when advising you.

       So that’s my public service announcement for today. If you want to continue learning about personal finance without the sales pitch, then sign up for free updates to Provident Planning today!

Related Articles at Provident Planning:

1. Do You Need Life Insurance?
2. How Much Life Insurance Do You Need?
3. How Much Should I Save for Retirement? – Part 1: How Much Income Will I Need in Retirement?
4. Home
5. Why You (Probably) Don’t Need Permanent Life Insurance

Track Your Spending for 3 Months

       One of the first tips you’ll find in the book (on page 9, in fact) is to track your spending for 3 months. Amy says the first step for anyone who’s looking to become more frugal is to find out where your money is going now. I agree with her. It’s hard to know where you should start looking to save money if you’re not sure what you’re spending it on.

       By taking the time to track all of your expenses, you’ll learn two things. First, you can categorize your expenses into essentials (needs) and non-essentials (wants). Breaking things down this way will help you see where you can make room in your spending.

       Second, you’ll see just how much you’re spending on your budget categories. Knowing this helps you target the biggest expenses to get the most impact. It will also make you more aware of where your money is going. Blind spending is a quick way to destroy your finances.

How to Do It

       So if you want to track your spending, what are your options? Here are some ideas:

• Paper – You can always do it by hand with pencil and paper. This is a time intensive method and makes it difficult to work with the data you collect. I wouldn’t recommend this method.

 

• Spreadsheet – Microsoft Excel, Open Office Calc, Google Spreadsheets, or Zoho Spreadsheets can be also be used to track your expenses. This is another manual method that takes a bit of time, but at least you can sort and use your data. If you’re not dedicated to routinely entering your expenses, it won’t work for you.

 

• Budgeting Software – Three of the best software choices for budgeting and tracking expenses are Quicken, You Need a Budget, and Gnu Cash. The advantage of these programs is that they store all the information on your computer, and they can automatically download your transactions from your banks and credit cards. They also offer more advanced reports than you’ll want to create in a spreadsheet. This is a much easier solution than the first two.

 

• Online Budgeting Websites – There are multiple options if you’re interested in using an online budgeting website. Mint, Thrive, Wesabe, and Yodlee all offer a free, online solution for budgeting and tracking your spending. You might not be able to use these sites if you bank at a credit union or small local bank, and you might be concerned about security issues with having all your info in one place. Security was my initial concern, but I did some research and decided to go with Mint. I like it so far, and I’d recommend you read their FAQ if you’re interested. This is by far the easiest solution. It only took me about an hour to set it all up the way I wanted.

Sign Up for Free Updates!

       If you want some more good ideas on saving money from The Complete Tightwad Gazette, make sure you sign up for free updates from Provident Planning. I write on a wide variety of personal finance topics, so even if you’re not interested in frugality I’m sure you’ll find something useful here.

This article contains affiliate links. Read my ad policy here.

Related Articles at Provident Planning:

1. Ways to Create a Budget and Track Your Spending
2. The Budget – An Essential Tool for Personal Finance
3. Budgeting Is Not Complicated
4. To Live without a Budget, You Must First Live within One
5. Free Stuff!