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How Many Hours Does That Cost?

Ask my friend Ramit Sethi [3] about the latte factor if you want to hear a good reason why finances shouldn’t be about pinching pennies. Ramit’s argument, about coffee anyway, is that you’re spending time on visible “easy” savings rather than less visible but larger dollar amount savings. You can save more in one call to a cable company than skipping your morning coffee, even though skipping morning coffee takes more work. You don’t have to spend a lot of time to get a lot of savings, you sometimes just think you do.

I just noticed that a lot of you are here because you clicked on a link in an email, I’d love it if you told me who sent it so I can thank them! Also, if you have any suggestions or comments on the calculator, I’d love to hear them in the comments below. Thanks!

I agree with that sentiment but I argue that finances, and life in general, is ultimately about trade-offs. You can get that morning coffee but it’ll cost you something else. In my mind, I always think about how many hours it’ll cost me. If I make $40,000 a year, how much does that coffee cost me in terms of time? A $3 cup of coffee costs you about 15 minutes of take home pay. Is a cup of coffee worth fifteen minutes? Or would you rather spend it on something else? By knowing the cost of something in time, you can make more educated trade offs.

I wasn’t aware of any calculators out there so I came up with a quick and dirty one that I believe is accurate (let me know if I’m wrong!).

How Many Hours Does That Cost? Calculator

This calculator will take your annual salary, deduct your personal exemption and standard deduction (single filers), figure out your tax liability using the 2012 tax brackets [4] and then deduct FICA (Social Security & Medicaid) to reach your take home pay. Then it’ll divide that by 2,000 hours (52 weeks, 40 hours with 2 weeks vacation) to find your hourly rate – then use that to find out how many hours it’ll take for you to pay for that thingy you want. 🙂

What is your annual salary?
How much is that item?
That will cost you… hours
Your hourly takehome rate was:
Your tax bracket: %
Your effective Federal tax rate: %

I threw some other interesting stats at the end for kicks. The take home rate hourly and takes into account taxes and FICA. Your tax bracket is simply your marginal tax bracket based on your salary minus the personal exemption and deduction. Finally your tax rate takes your tax liability and divides it by your salary, it will always be lower than your actual tax bracket.

Let me know what you think!

(Photo: frield [5])