Let’s say you make 75k per year. Well, you actually don’t. We all know this. “Take home pay” is a common metric, but it’s still not the full picture.
My problem is I use that salary number to justify purchases, maybe not consciously, but on some level it definitely affects my financial decisions, especially when I’m weighing buying something I may not need.
This concept really comes from the book Your Money or Your Life. In there, you compute your “real hourly wage”.
Let’s take a look:
Income:……………..$75,000
Taxes (25%):………-19,000
…………………………$56,250
Next, we have to remove our fixed costs. You should calculate this on your own, and figure out how to make it as truthful as possible, but if we pull from Ramit Sethi’s work, we can HOPE that falls between 50% – 60%. For some, even assuming 60% is going to be VERY generous.
New Total:……………..$56,250
Fixed (60%):………….$33,750
……………………………..$22,500
That means you really only “make” $22,500 per year, and we haven’t even gotten to any savings, investments, or lattes.
I think this number, $22,500, is a better number to talk about when you’re sitting around talking finance with friends. And we all know someone who thinks they “make” a lot of money, but in reality what they really “make” is probably negative.
For this example, which doesn’t even include investing etc, the following calcs would be relevant:
Monthly Profit:……………..$1,875
Hourly Profit:………………..$10.80
You make $10 an hour. Spend like it.