Those shoes cost $100? Great! That’s 10 hours of work at $10 per hour, right? Once people start working, it becomes slightly easier to recognize the true cost of things they buy. That’s because they can compare the dollars spent to the number of grueling hours working behind the counter to earn the money needed. While this can be true in your early years of work, there is a major flaw with this strategy that we should examine.
Basic living expenses
One factor a lot of people tend to miss when they use the above strategy is the cost of monthly living expenses. For example, if your rent is $500 per month, then if we assume you work full-time, roughly $3 per hour is being diverted directly to rent costs (divide $500 by 160 hours for a month). Additionally, you’ll want to factor out the costs of utilities, groceries, loan payments, insurance, etc. These are all costs you pay monthly (or more frequently) that require a portion of the money from every hour you work. This reduces the total available money per hour that you can spend on luxuries and extras.
Another commonly forgotten factor is the tax that’s removed from your gross pay (total earned) each pay period. This amount will vary, depending on how much you earn, but you can expect a reduction in available money in your pocket to spend. As a result, you’ll have to work more hours to earn the money needed to buy something than you might think.
Putting it together
When you factor out taxes and living expenses, you’ll find that the amount of available money per hour is far less than anticipated. This extra money is commonly referred to as “disposable income” because you can spend it on whatever you like without affecting your overall financial picture. The next time you think about buying something because you can earn the money back with only a few hours of work, consider what other expenses might affect that calculation.