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By Elizabeth Kerr
Happy New Year and welcome back.
I’m never one to mince around so lets get right back to where we left off, that’s why we are here together again isn’t it? Whilst everyone else is harping on about how to make 2015 your happiest/fittest/adventurous and stress free year, provided you say 30 positive affirmations in the mirror every day, I’m going to help you answer the following question so you can really start the year in your favour.
What is your time really worth?
Most people will have a vague idea of what they earn per hour, even if they are on a salary. To illustrate this week we are going to look at Katie, mid 20s, renting, single, no kids, works for a mid tier recruitment company in the city. She earns $80,000 per year (including commissions) and works a 40 hour week. She has no student loan and contributes 3% to her KiwiSaver In her mind she calculates the following equation:
$80k ÷ 52 weeks of the year ÷ 40 hours per week = $38.46 per hour
That is as far as she takes it and so she goes on to evaluate all of her spending decisions based on earning $38.46 per hour. But wait…. even you can see she has forgotten something. What about taxes and KiwiSaver? Yes you’re right. The calculation really needs to look like this :
$80k –(tax $17.320 + KiwiSaver $2400) = $60,280 ÷ 52 weeks ÷ 40 hours = $28.98
SO that looks a little better. Now she understands that the better number to be using is $28.98 to evaluate spending decisions.
But wait… it actually doesn’t end there. Unless she is some kind of robot that never eats and can sleep and shower at her workplace, then she has some non negotiable expenses which are just as mandatory to pay as is tax. So it would be smart to include this as well. Suddenly her hourly worth is not as shiny as she first thought.
Late last year I introduced you to my personal take on budgets and why they don’t work and what you need to do instead. (If you have been disciplined enough to sit down and write a traditional budget for this year that’s great but let's be honest, you’ve already broken it haven’t you?) Sticking to a traditional budget is like trying to be a vegan at McDonalds – bloody near impossible. If you’re familiar with my previous columns from late last year you’ll know my stance on budgets already.
In summary for today - in order to be financially successful you need only two things – a pot for your ‘non-negotiable’ expenses and a pot for everything else. This is based on the fact that there are some things in life which you have to spend on in order to keep yourself safe and healthy, and the rest is used for your thrills and giggles and comes down to personal choice aka Lifestyle Design.
All the money in your “everything else” list is what is holding you back from achieving your own money machine. This list is the one that holds the majority of your power because if you can design a lifestyle that will delete/reduce the optional expenses on this list and instead save that money then you have some real money magic going on. To see the original column on this click here.
Back to Katie – her weekly non-negotiable list looks something like this:
1. Rent – $160.00
2. Basic transport - $55.00.
3. 1 communication device $17.25
4. Insurances $15.00
5. Basic food $80.00
Total cost per week = $327.25
SO now the calculation looks like the following:
$80,000 – 19720 ÷ 52 weeks = 1159.23 per week – 327.25 = 831.98 ÷ $20.80 per hour.
This is how much Katie is really allowed to spend. See how easy it is to get distorted into thinking that you actually have a lot more money to play with than you think you do? In this instance Katie assumed she earned closer to $38 per hour but in reality it was actually closer to half that amount.
Show me the money
The real power comes when Katie is making purchasing decisions. Now that she knows the value of each hour of her work she can figure out if buying something is really worth that time.
As an example she is really enjoying the summer and thought it would be great to buy a BBQ for the flat. At $499 she thought she had found one she really liked. When taking into account her real hourly rate that BBQ worked out to cost her close to 24 hour of work. That involves getting up everyday, ironing clothes, scoffing breakfast, hurrying her hair, waiting for the bus, forgiving her colleagues, biting her tongue followed by eventually coming home exhausted for three whole days!! This is all because she wanted to have something to cook her bangers on for just several days of the year. Suddenly that BBQ just wasn’t worth it.
Its not like this all the time for Katie though. She has been reading my columns and is starting to design a lifestyle that reflects her personal values – not the ones dictated to her by clever advertising and peer pressure. If Katie felt her life was missing something really important by not having a BBQ then 3 days of working for one might have seemed a fair deal in her mind; and on another day her values might dictate that she baulk at the idea of paying $200 for a pair of shoes (1.2 days work).
This really is quite a personal calculation and so before you hand over your money next time ask yourself how many days work are you prepared to invest in owning that product.
You might like to affirm it to the mirror 30 times each morning just to be on the safe side. *wink*.
26 Comments
Article lacks realism, woman in mid 20s on 80K? come on really. And no student loan = rich parents (worth mentioning). This upper class fictional woman would have to be working in Auckland, and then I read she is only paying $160 a week in rent I wonder what part of Auckland that is.
Not necessarily. Success in recruitment can be very lucrative and one does not need a degree to perform the role. Maybe Katie rents at home and has worked in specialist IT recruitment since leaving high school 8 years ago. If the sums are a bit hard for you to stomach then make up your own story.... the essense of the column this week remains the same regardless.
The more i look for it the more elusive the answer becomes. I was actually hoping by asking that you had the answer :)
According to the NZ stats website it says $991 per week or $51,532 per year. However, looking closer this only includes information from salary and wages (no business or rental income) and if beneficiaries answered this question in the census it will include them as well.
For earners over 15 years of age 1,104,804 people earned less than 60K and 424,194 earned more than that. (again, may include beneficiaries).
I know this doesn't actually tell us what we really wanted to know but i think its as close as I am going to get tonight.
I have to disagre with you Joshua. I am the Mother and Aunty to several women in our family who fit the category.
This article highlights the negative compounding effects of costs and taxes!!!
It is like when someone makes a muck-up on a job which was intially valued at e.g. $1000.00 for the labour the compounding effect of that error will be $3000 plus.
Again good point. If she could purchase her BBQ at a cheaper price the work effort required might not be as much to personally justify the expense.
(not directed at you Square - just for those who are reading the comments). Having said that just because something is cheap does not mean it should be purchased.... that's called 'SPaving' ie" spending because it's a saving". (see column 9th Dec).
au contraire, i am a gun for hire, paid a day rate. Every day on holiday and every day sick is a day less pay. But i work to live. So when i estimate my earnings for the year, I allow a generous holiday and sick leave allowance. Then i can take a holiday knowing it's budgeted for. If i don't get sick that year, and therefore work and earn more than planned, well that just a bonus. I could sacrife my holidays and work more days, but what's the point of that? I'd rather work less days. Having returned from London where 6 weeks leave + stats is typical, i find our measily 4 weeks a poor work/life balance.
Its all realative i guess. We own one simple car, much less than most of my contracting colleagues, and i ride a bike to work to avoid the running costs or bus fare. It leaves me richer in other aspects of life. But for others their fancy car is their pride and joy and their couldn't care about extra holidays.
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