Have you ever wondered for every dollar you earn, how much you can buy with it? Or have you figured out what your take-home pay is for each hour you work?
These are good numbers to have in mind when you want to buy something. The price of a purse can easily be converted into the number of hours worked in order to pay for it. For example, let’s say you want to buy a new purse that costs $100. If you make $20/per hour (which is about the average median wage in the US), you may think it costs you 5 hours of work to buy the bag. But that is not true. It actually will cost you almost 7 hours of work. Here is how it is figured:
- First, a person buying a purse that costs $100 will pay that plus taxes. In my town, a $100 item will cost $108.25, which includes state and local sales taxes that total 8.25%.
- Then you must consider what taxes and other fees come out of your paycheck. $20 is your gross hourly pay, but your take-home will be less. You can generally estimate that at least 15.65% will be withheld for income taxes (which averages 8%), Social Security (6.2 %), and Medicare (1.4 %). So your net pay per hour is $16.87.
- Divide the cost of the purse ($108.25) by the net pay per hour ($16.87) and you discover that it takes 6.42 hours of work to pay for the purse. If you live in a state, county, or city that also collects income tax or if your Federal income tax is higher, then your net pay per hour will be lower.
Imagine how many hours it takes to pay rent or mortgage payments. And new tires probably cost over half a week of work hours. Just filling up your car’s gas tank may take three hours of work to cover the cost.
Go ahead and figure out your specific take-home pay per hour. Keep this figure in mind when buying items you don’t have to have, such as a new dress or candle. Divide any expense by your hourly take-home wage. Decide if the number of hours you worked in order to buy the item are worth the price. You might decide to keep your money instead.
I have heard people justify a purchase because, “It is only $20.” However, on average, that is over an hour of a person’s life. Is an hour worth throwing away?
If you are salaried:
Let’s say you are an office worker making $37,488 (per Salary.com) a year. If a person works full-time (40 hours per week) x 52 weeks, they work 2,080 hours per year. Divide the salary ($37,488) by the number of hours worked (2,080) shows that the office worker makes $18.02 gross per hour. Assuming the office worker is single, their employer holds out: Federal Income taxes of 12%, Social Security of 6.2%, and Medicare of 1.45%, which means the office worker probably takes home about $16.46 an hour.
The nationwide average monthly rent is $1,164 according to iPropertyManagement.com. That means the office worker spends over 1 1/2 weeks of work to pay for a place to live. That probably doesn’t include all the associated bills such as utilities.
To figure out how much you make per hour:
Look at the stub of your paycheck. This will help you figure out exactly what you take home per hour. This is the magic number we want. Your paystub will show how much you were paid and what was held out.
Once you have calculated your net pay per hour, I want you to memorize this number. Every time you go to make a purchase, I suggest you divide the cost (taxes, shipping, etc.) by this number. This will give you the number of hours you must work in order to make the purchase.
These figures may not make a difference to you and how you spend your money, but I think they are important to know as part of your financial literacy. Maybe these figures will encourage you to find a great designer purse at a garage sale or resale store. Or they might make you think you need a second job! Regardless, time does equal money, so we need to spend both wisely.
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