The Real Cost of 'Needs' Versus 'Wants'

Have you ever found yourself debating, I mean really debating, whether to buy something or not? Maybe you're eyeing that new smartphone, but your inner voice tells you it's too expensive. Or perhaps you're thinking about getting a gym membership, but you're not sure if it's worth the cost over the entire contract.

We've all been there, questioning our wants and needs when it comes to spending money. But what if I told you that this constant battle of "needs vs. wants" might be sand-bagging your financial success?

Through my own journey of financial struggles and successes, I've come to realize that the real question we should be asking ourselves is: "Is it worth the time I must trade to bring this item into my life?"

Let's dive deeper into why redefining our "needs" can lead to greater financial well-being.

Breaking Free from the 'Needs' Trap

Our "needs" in terms or spending are the things that are truly necessary for basic survival and well-being. They are something required for us to maintain a reasonable standard of living. Things like food, heat, clothing, shelter, and transportation. However, the term "need" is often twisted in the context of our spending, leading to all sorts of mental gymnastics.

It's often overlooked that the perspective of "needs" versus "wants" is entirely subjective, and we each define them in our own way. While we can agree that food and shelter are necessities, the line becomes blurred when considering a new car or dining out. Our individual preferences and lifestyle choices shape our own set of "needs," and this understanding is crucial, especially if financial freedom is a goal. 

Food, even an extravagant steak dinner at Casa Do Abel is a "need", right?!

The Emotional Economics of Spending

 The more dangerous way in which we twist this framework stems from emotional impulses and societal pressures. We get caught up in the marketing and hype and begin to justify certain items or experiences as a "need" in our life. We get really good at these justifications, often overspending and prioritizing these items over other critical financial obligations.

Take my story, for example. Before I graduated college I signed a lease on a brand new Audi with a sticker price more than my first year's salary. I justified the cost as simply "transportation" and a reward for four years of hard work earning my engineering degree. I deserved to enjoy my commute in a luxury car. All this while living in my parent's basement so I could also make my minimum student loan payments. I earned a gold medal in mental gymnastics during that season of life. 

I don't want to know how many years of my life this "transportation need" cost me 🤢

So how do we ensure our best laid plans don't fall victim to the budgeting cartwheels? We need an objective way to frame our spending that eliminates our tendencies to justify items, services, and experiences into a "needs" category whenever it suits us.

Time is Your Most Valuable Currency

While money can be earned and saved, time is a finite resource that cannot be replenished. Despite what the productivity gurus will tell you, you can never actually "save" time. This makes it an incredibly valuable currency that we often take for granted. In fact, many people prioritize earning more money at the expense of their time, only to realize later on that they have missed out on important moments and experiences.

When we start thinking about our spending in terms of time, it becomes easier to prioritize and make more conscious choices. How many hours of work are you really willing to trade in exchange this choice? For example, is that expensive dinner worth an extra few hours at work? Is that new gadget really worth the fifteen hours you have to spend working?

Reframing your time as the currency you use to make everyday purchases can be a total game-changer. It was for me. When I was first learning this concept, I ran the calculation during a quiet workday lunch at a local burrito spot. I had to triple-check my numbers because I found that the lunch didn't cost me a few bucks, but rather an entire hour of my time. That next hour back in the office hit different!

Calculating the Cost of Your Time

We should all know how much our time is worth. Knowing your number allows you to make informed decisions with spending, outsourcing work, job hunting, and more. To calculate the actual cost of your time, in increasing levels of accuracy, follow these steps:

The Quick and Dirty Calculation:

Determine your hourly rate. This is the amount you get paid for each hour of work. If you have a salary, divide it by the number of hours you work in a year (typically 2,080 hours).

🔧 Hourly Rate = Salary ÷ Total Work Hours

For example: $90,000 ÷ 2,080 = $43.27 per hour

A Tad More Accurate:

Let's factor in taxes (because Uncle Sam always gets his cut). Take your hourly rate and subtract the percentage of taxes you pay (usually around 25-30%).

💸 After-Tax Hourly Rate = Hourly Rate - (Hourly Rate × Tax Percentage)

For example: $43.27 - ($43.27 × 0.25) = $32.45 per hour

The actual cost of your time: Your True Hourly Wage.

The time you spend working at your desk is only one factor to consider. In order to fully understand how much time you exchange for each dollar, we'll have to dig a bit deeper...

Calculating Your True Hourly Wage

To calculate Your True Hourly Wage you'll need to count all these extra job-related hours:

• Commuting to/from work
• Getting ready (including camera-ready for Zoom)
• Travel for work trips or sales calls
• Shopping for work supplies or clothing
• Decompressing after a long day
• And any other time that comes out of your day only because of your job.

Lastly, be honest with yourself about how many hours you work during an average week. If your job expectations require you put in 60+ hours, use the real number of hours worked. If you are quiet-quitting and only do 25 hours of real work, use that number.

Now let's put it all together. You can download my free True Hourly Wage Calculator or follow these steps:

Hours per Year for Your Job

Add up all the time you spend on an average week and multiply by 52.

⏳ Hours per Year = (Working + Commuting + Preparing + Traveling + Supplying + Recovering) × 52

For example: (50🧑🏽‍💻 + 10🚗 + 5👔 + 3✈️ + 1🛍️ + 9🍷📺) × 52 = 4,056 hours

What the Company Really Pays You

Now let's calculate how much your job actually pays you for your time. Using your actual yearly job hours, divide your salary by the number of hours you actually spend on your job.

🔧🧑🏽‍💻🔨 Actual Hourly Comp = Salary ÷ Total Hours per Year

For example: $90,000 ÷ 4,056 = $22.19 per hour

Calculating Your True Hourly Wage:

Finally, subtract the taxes. Take your pre-tax rate and subtract the percentage of taxes you pay.

😩 Your True Hourly Rate = Actual Hourly Comp - (Actual Hourly Comp × Tax Percentage)

For example: $22.19 - ($22.19 × 0.25) = $16.64 per hour

Now that you have a clear understanding of how many hours you dedicate to your job each week, you know Your True Hourly Wage. This is the amount of money you are actually making per hour after taking into account all the time and effort you put into your job. Knowing this number can have a profound impact on your spending choices.

Strategies to Make Empowered Financial Choices

Making empowered spending choices is all about being aware of the true cost of our purchases in terms of our time. With Your True Hourly Wage in hand, here are some strategies to help you make spending decisions based on a time-cost analysis rather than impulse:

1. Prioritize your expenses: Start by listing all your potential expenses and prioritize them based on their importance. This will help you see which expenses are worth your time and which ones you value less.
2. Calculate the actual cost: Before making a purchase, calculate its cost in terms of hours. This will give you a clearer picture of the true value of your purchase and help you make a more informed decision. For example, that drive-thru lunch isn't $11.74, it would be $11.74/$16.64 per hour = 0.71 hours of work.
3. Delay gratification: If you find yourself wanting to buy something on impulse, give yourself a cooling-off period of at least 24 hours. This will help prevent you from making impulsive purchases and allow you to make a more rational decision based on your values and True Hourly Wage.

By learning to evaluate your spending decisions through this perspective, you will naturally reduce your expenses. Practicing mindful spending establishes a sustainable budgeting framework that becomes second nature, while avoiding the trap of extreme frugality, one of the pitfalls of FI/RE.

By taking into account the real cost of purchases in terms of Your True Hourly Wage, you can steer clear of impulsive buying and prioritize expenses that align with your long-term goals and values. This approach fosters self-control, builds confidence, and reduces stress related to overspending or conflicts in budgeting.

Unlock Financial Stability and Achieve Your Goals

Shifting our spending decisions from "needs" and "wants" to Your True Hourly Wage is crucial for achieving long-term financial stability and reaching lofty goals. With mindful spending, you can create a healthier relationship with money and take charge of your financial future.

By prioritizing expenses, calculating their true cost in terms of hours, and delaying gratification, we can avoid making impulsive purchases and instead make more informed decisions based on our values and priorities. This method not only leads to reduced expenses but also promotes self-control, confidence, and overall financial well-being.

Every hour you spend working to pay for impulse purchases is an hour missed doing the things you truly love. So the next time you feel tempted to make an impulse buy, remember to consider its cost in terms of Your True Hourly Wage and make a conscious decision that aligns with your goals. Your future self will thank you for it.

I would love to hear about your experiences and how this approach has helped you become a mindful spender. Share your story with me and inspire others on their journey towards financial stability. Happy spending!