Wednesday, December 12, 2007

Pay for things in hours, not dollars.

I touched on the fact that credit cards breed a disconnection with one's finances in an earlier post. While I did explain at length that it is typically a good idea to pay for things with other, just as conventional methods (cash, debit, check) there are a couple of other ways to go about limiting yourself if you find yourself subconsciously (or consciously..) vacant when it comes to your spending habits.

It's a trick a lot of expensive self help books like to mention, but I've yet to see it published online. Mind you, I'm sure it's floating around on the internet somewhere. The problem is finding it. So I thought I'd make it accessible to those who may happen upon this post.

Sometimes cost means a lot, sometimes it doesn't. I believe there is a cut off point, hardwired into each individual's brain where a cost simply stops registering an emotional reaction. I like to call it the "common sense over-reaction." Your brain simply goes kaput once numbers start registering high enough.

This can and will occur, even if the individual is shelling out single dollar bills for a new plasma screen TV.

Let me elaborate.

Assuming you have some financial freedom that allows you to spend some of your hard earned money how you like, you'll often find yourself making compromises to yourself or your other. Consider it a misdirection.

Let's construct a scenario. You're shopping for a new television at Best Buy. You walk the infamous line of dolled up entertainment centers blasting out Toy Story on HD Surround Sound. You need a new TV, and you can luckily afford a pretty good one.

You see a lot of costly set ups. One's for $650 with free delivery, one's $990 with bundled surround sound, one's $2,500, but it comes with a sweet little DVR and a $100 gift certificate.

So you examine all of your options and you pick the first one. It's a pretty nice television and hey! you get something free!

Sure, you probably made one of the more responsible picks. But did you really register how much $650 dollars really is? Sure, it was the cheapest. But it was also right next to sets that went all the way up to $2,500.

To steel your heart and desires a little, consider your income and apply it to any large purchase. Instead of $650, calculate how many hours you're going to need to work in order to pay for that television.

For the sake of having a round number, let's say you make $10 an hour. That means you're going to have to work 65 hours in order to pay for that television in full. That's about two work weeks. Before income taxes. Before sale taxes. Before interest (if you pay on credit, shame on you).

Consider what you do for a living. Whether you're a handyman or a tech support representative, do you really want to bust your ass for two weeks for a single really cool television? Is it really worth it?

It's certainly your money. You may do whatever you like with it, but all of a sudden $650 looks like a lot more now, doesn't it?

The same logic applies if you make double that. Consider you make $20 an hour. Maybe you want a fishing boat. Well, before all of the other associated costs, would you be surprised to know that a $6,000 dollar fishing boat with trailer costs you over two months of pay? Is it worth it? Maybe. Maybe not.

It's a fun little trick to apply to other things you may buy, too. How many hours of toiling away at the office in order to go out to dinner to spend $50? How many weeks spent selling vacuum cleaners to get that beautiful new snowblower?

And hey, if it helps you at least once, it's worth the consideration and a little bit of simple math.


SavingDiva said...

After taxes, retirement contributions, healthcare costs, etc....I make about $13.30/hour. I would have to work about 49 hours to pay for a $650 TV...not worth it!


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