and you can find the first post in the series here. *************************************
I'm going to break Chapter 2 down into a two-part post. Today, we'll cover definitions of money and go over the "real hourly wage" calculation. Next week, we'll cover the "daily money log" portion of Chapter 2.
Money is a strange thing. We have baggage about it, we project our feelings and emotions onto it, and yet, honestly, many of us don't really know exactly what it is. Our society is already awash in pat definitions and ego-protecting perspectives for money, most of which encourage us to forget everything and buy stuff so we'll feel better about ourselves.
Forget all that. What we need is a way to think about money that helps us manage our financial lives more effectively. How can we take back our power over these little pieces of paper sitting in our wallets?
What does money mean to me? Before we get to YMOYL's definition of money, I want to ask readers what does money mean to you? Feel free to share your thoughts in the comments.
And since this is my blog, I'll share my definition too: For me, money provides time and flexibility. A simple example: using a time-based framework for money, you can take the amount of spare money you have, divide it by your expenses per month, and you'll know the number of months you can afford to not work for money. That time is yours--not your boss's time, your clients' time or your company's time.
Here's another way to think about money in time-based terms: every act of spending must be matched with time spent earning money to pay for that expenditure. Of course, it's a giant irony that many of the things we buy with money merely weigh us down and create the opposite of flexibility.
I also try (with mixed success) to see money as an intellectual challenge--like a game I can play for fun. This part of my definition of money is in many ways the most useful, because it helps me look at money in a less emotional, more carefree way. It's my way of taking back my power over money. Hey, whatever works.
Is my definition right? Is your definition right? These are the wrong questions. The right question is: is your definition of money effective? Does it help you take back your power over money, or does it "help" you give your power away?
Which brings us to YMOYL's definition of money:
Money is something we choose to trade our life energy for.
I can't say their grammar turns me on, but I'll give our intrepid authors credit for offering a solid, mind-opening definition of money. It frames money as a choice (do you choose to trade it away or not?) and it frames money in terms of time. And as we'll soon see, it's both useful and empowering.
Life energy? Isn't that a little, uh, airy-fairy? I'll confess, when I first read YMOYL ten years ago, I rolled my eyes at this point of the book too. I had to wrap my mind around this chapter--and in particular I had to wrap my mind around the "real hourly wage" concept--before I really understood what the authors were trying to achieve with their definition. Let's give the authors a little extra rope here.
Your REAL hourly wage: Okay. The most important idea in this post (and perhaps the most important idea in all of YMOYL) is on pages 57-66 where you calculate your real hourly wage. This is where you take your actual wage and adjust it for all of the various extra costs and time demands your work life places on you.
If there's one section of this book that will help you substantially rethink how to balance life, work and money, this is it.
Be warned, the number you arrive at may depress you. Initially. But keep in mind: the entire point of the real hourly wage calculation is to help you understand all of the costs you bear by working. It may give you certain information that encourages you to leave your current job--or at the least, consciously alter the expenses you choose to bear while you're at that job. Furthermore, it can be an extraordinarily useful number to help you choose your next job. As the book says, "a job that requires a longer commute or has more costuming expectations might be less remunerative in reality than one with a lower salary."
Before taxes or after taxes? A quick side note: I disagree with the book's calculation mechanics. They tell you to start with your gross wage. I think you should start with your after-tax wage (the "net pay" number on your pay stub). Think about it: almost all of your expenses are paid for in after-tax dollars, so it's not really fair math to use pre-tax dollars as your starting number. In essence, your pre-tax, gross wage is really a phony number. Only the government can get at your gross wages. You can't.
Understanding the true cost of your spending: Here's what's even more important about your real hourly wage: it helps you quantify your spending in terms of how many more hours you'll need to work to pay for any given purchase.
This is a staggering insight for many readers. You want to lease that new luxury sedan you just saw on TV? The down payment alone is gonna cost you 150 hours of life energy, and the lease (plus the added insurance costs) will hit you for another 20 hours of life energy every month. Every month. Hmmm. Maybe I'll keep my Honda for a couple more years after all.
How many hours of life energy does your house cost? Private school? Your timeshare? The $1,620 a year you spend on cable TV?
Let me say it again: this is an empowering framework for thinking about money. We are all making a trade when we work and spend. Now you know an extremely accurate way to measure that trade. Is it really worth it to you?
Big city living: The real hourly wage framework also reveals the true math of living in expensive cities. The bottom line? The economics can get ugly in a hurry. You may think the extra fifteen grand you "earn" in gross salary makes it worth it to live in metro Washington DC, metro New York or some other high-cost location. Sadly, this can be one of the worst lies of urban professional life. Once you look at your true costs in all their naked glory, that extra salary simply may not be worth it.
What path are you on? Does your job really help you build wealth? Do your lifestyle and spending decisions really make sense? Most people never think through this at all. Instead, they allow their expenses and lifestyle decisions to be set by passive factors like social conditioning, or competition with their friends and neighbors.
Let's be brutally honest here: that's a recipe for working twenty or thirty years and not having much money or life energy to show for it. The sooner you recognize this and get your mind around the exact math and economic implications of your life, the better.
Uh-oh. It's that pesky ego again: At this point, some readers will hear themselves saying things like "I'm not really preoccupied enough with money to bother with this" or "I deserve my lifestyle--why are you so uptight about spending?" or "What the hell do you know about working in a big city?"
If your ego whispers stuff like this, please think carefully about how active or passive you wish to be over the remaining years of your life. Do you really need protection from the truth of your economic situation? How much power do you really want to give away to your ego--and to your money?
Remember, your ego doesn't want you to see the truth. Ignore it, and choose a more empowered and truth-centered perspective for evaluating your current life economics.
Here's one extremely empowering perspective you can start with: The more conscious you are of your true job-related costs, the more you can manage them downward. Therefore, the higher you can make your real wage! Reread that sentence, and then try and tell me you don't have far more power over your financial situation than you thought.
Additional Time Till Civil: One last point. Take a close look at the checklist of life energy costs on pages 64-66. Look on page 65, below where it says "Daily Decompression." There's a few amusing line items here, including recreational substances and time till kids can yell again. Anyone who's ever worked would agree: these really are legitimate costs of working.
Let me make a confession: when I scanned over this list and saw Additional time till civil, I died a little inside.
Readers by now know that I worked in a high-stress, long hours Wall Street job for nearly 14 years before leaving full-time corporate work in 2008. On many days during my career, it literally did take me anywhere from 30 minutes to an hour after I got home to become civil. My ego can be pesky too, and only now can I freely admit how skillfully it shielded me from this truth.
I'd give anything to have that time back.
****************************************
Appendix/Side Thoughts:
1) "Men do not desire to be rich, only to be richer than other men." This quote from John Stuart Mill (on page 54) could not be more fitting, both for this book and for our society today. It illustrates how comparisonitis is a nearly universal insanity in our culture.
2) One more simple framework for thinking about the high cost of spending: I thought I'd share a slightly different application of YMOYL's framework, one that my father repeatedly told me throughout my childhood: "A dollar spent is two dollars earned."
At first, I was like, "Dad, duh. A dollar is a dollar." That was before I started paying taxes.
Once again, you pay expenses with after-tax dollars, but your gross salary is in pre-tax dollars. Take a good look at your pay stub, and you'll see that once all of the various taxing authorities get paid (Federal, State, Social Security, Medicare, etc), you only end up with about half of your gross wages. Half.
(PS: Don't let this make you angry--that's just another example of giving your power away. Instead, let this provide you with still more incentive to save even more relentlessly, and more incentive to supplement your tax-disadvantaged salary income with tax-favored income sources like dividend-paying stocks, municipal bonds and so on.)
Once again, in order to pay that dollar you're about to spend, you need to earn two dollars in wages. This simple phrase has been more valuable to me than an entire library of personal finance books.
3) A mistake only a geek could find: There's a somewhat embarrassing mistake in the 2008 edition. Note on the chart on page 62, where it cites a "real hourly wage" of $6. Then, directly underneath the chart, note where it says "Every dollar spent represents 15 minutes of life energy."
Wrong. If you earn $6 an hour, then it takes you one-sixth of an hour to earn one dollar. That's ten minutes, not fifteen. Oops.
I'm guessing that the "15 minutes of life energy" quote was just copied from the the 1990s edition, which used $4 an hour in this example. Of course $4 an hour actually does work out to 15 minutes per dollar. I wonder, though: what does it mean that there's a 50% increase in "real wage" inflation from one edition of YMOYL to the next?
Next: YMOYL Chapter 2, Part 2: Keeping Your Daily Money Log
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2 comments:
I agree with you 100% regarding the net pay issue.
There is one other large issue...if I'm reading them correctly.
When they calculate your "real wage", they net out job related expenses. I get it. But then, when they calculate how many hours you need to work, they use that netted down number. Can't do that -- you're double counting.
By way of example, consider someone working 40 hours a week for $10/hr after-taxes, so they net $400. Say their job related expenses are $80 and that all other expenses are $320 (you break even).
They would calculate your "real wage" as $8/hr ($400 - $80 = $320 / 40 = $8. But then they would say that the $80 in job related expenses cost you 10 hours of your "real wage" ($80 / $8/hr) = 10 hours, and that "everything else" would cost you 40 hours. But wait! That's 50 hours for what is truly 40.
Personally, I prefer to use the net wage, then calculate based on that. So again, using the example, your job related expenses cost you 8 hours of work ($80 / $10/hr) and all other expense cost you 32 hours ($320 / $10/hr).
You can still look at it that you work 40 hours to get 32 hours worth of spending.
Another, yet theoretical, issue with their approach is that it actually looks like you're making money doing non-productive stuff. For example, if you spend 10 hours commuting, they show your "work related hours" as 50. Ignoring the $80 of job related expenses for this example, your net wage is $400/(40+10) or $8/hr. But that only holds true if you really think you're earning $8/hr while you are commuting.
Again, I get what they're doing, and perhaps for their target market it is a better approach. I'd rather look at my true net pay and consider my time lost commuting separately.
I hear you on job expenses and they shouldn't be double-counted.
However, non-job related costs, like an unnecessary purchase (a "gazingus pin" as YMOYL likes to phrase it) or a cable TV subscription that you hardly use, etc., those costs are meant to be looked at in terms of units of worktime required to pay for them. And you *should* look at these purchases using a true real wage, which includes all job related timesinks that naturally occur along with work. Including "daily decompression" and "time till civil." ;)
DK
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