While reading about saving and frugality, I recently came across a concept that I found really interesting and worth exploring further. You might see more articles about it in the future, but let’s first understand the concept in detail.
(Alert: This is a very long article. At the same time, it is also very useful and thought provoking. Please read it when you can set aside 10 peaceful minutes)
“Number of hours you have to work for it” as a unit of measurement
The concept is actually quite straightforward. We earn money by working 9-10 hours a day, and use that money to spend on things that we like (apart from the essentials). So, this concept says that in effect, we are paying for something we buy through the hours we put in to work!
Simply put
You measure an item’s worth as “number of hours you have to work for it” instead of in plain Rupee terms
Let’s understand this using an example.
Calculating Your Per Hour Income
The starting point for us is your per hour income. How do we calculate it?
Let’s say your income is Rs. 8,00,000 per year including the bonus. You work fr 9 hours a day, 5-days a week. In this case, you would be working for:
52 weeks * 5 days * 9 hours = 2,340 hours per year
So what is your per hour income?
Per hour income = Rs. 8,00,000 / 2,340 = Rs. 342 per hour
Other costs and benefits
But is this your real per hour income? No!
To find your actual, effective hourly earnings, you need to factor in a lot of other things. Here’s a sample list:
Things that would decrease your per hour earnings
- Income tax paid
- Extra hours worked at office
- Time spent during the commute
- Money spent on commute
- Money spent on work clothes and accessories
- Money spent on child care (if say a day care needs to be arranged since you are working)
Things that would increase your per hour earnings
- Paid leaves
- Company’s contribution to your provident fund
Factoring in other costs and benefits
Let’s continue our example.
Income tax paid
Let’s assume your average rate of income tax is 15%. This means the income that you get in your hands for the hours you put in is Rs. 6,80,000 per year.
Note: You can argue that the money paid as taxes is used by the government to provide us with services like roads, so it shouldn’t be deducted. However, I fell it should be since:
- The quality of such services is questionable, and
- These services would continue – and you can continue availing them – even if you stopped working and didn’t pay any income tax
Money spent on commute
Some of the money you earn is spent directly for work related commute – if you didn’t work, you would not have this expense. Therefore, it should be deducted from your income.
If we assume your commute expenses are Rs. 1,000 per month, your income reduces to Rs. 6,68,000 per year.
Money spent on work clothes and accessories
There is some money that you spend on formal clothes, shoes, etc. If we assume it to be Rs. 5,000 per year, your income further reduces to Rs. 6,63,000 per year.
Money spent on child care
If child care has to be arranged as a direct consequence of you working, even this cost should be deducted from your income since this is the money you could be saving if you didn’t work. I suspect that this factor is more relevant for working women.
If we assume child care cost to be Rs. 2,000 per month, your yearly income becomes Rs. 6,39,000.
Company’s contribution to your provident fund
Although you don’t get this money in your hands immediately, your company contributes to your provident fund account every month – this money is eventually yours. This is normally 12% of your basic salary.
Assuming your company adds Rs. 2,000 to your PF every month, your yearly income increases to Rs. 6,63,000 per year.
Paid leaves
Although we have considered 52 weeks of work at 5 days a week, you do get some paid days off. This number should be reduced from the number of hours worked during the year.
If you get 15 paid laves in a year (including casual leave, sick leave and any other leave by any name), your working hours are reduced by:
15 * 9 hours = 135 hours
Therefore, the hours worked during the year = 2,340 – 135 = 2,205 hours
Extra hours worked at office
There are times when you have to stay back at your office and work extra hours – for meeting a deadline, for example.
If we assume you have to spend 1 extra hour every week at work, thats 52 hours per year.
Thus, the hours worked during the year = 2,205 + 52 = 2,257 hours
Time spent during the commute
You also spend some time commuting every day to and from your work. This is the time spent indirectly for your work, and should be included in our calculation to arrive at your true hourly earnings.
If we assume that you spend an average of 1.5 hours every day on your commute, that adds up to:
1.5 * 5 days a week * 52 weeks = 390 hours.
Therefore, total hours worked during the year = 2,257 + 390 = 2,647 hours
Your REAL per hour earnings
Ok, so now we have:
- Your real income in hand = Rs. 6,63,000 per year
- Time really spent for earning this = 2,647 hours
Applying the formula:
Your real hourly earnings = Your real yearly earnings / Time actually spent to earn it
In our case,
Your real hourly earnings = Rs. 6,63,000 / 2,647 hours = Rs. 251 per hour
That’s significantly lower than the Rs. 342 per hour calculated earlier, right?
Applying the “number of hours you have to work for it” principle
Ok, so we finally come back to the principle!
You measure an item’s worth as “number of hours you have to work for it” instead of in plain Rupee terms
Again, this is best understood with an example.
Example 1
Say you want to purchase a new LCD TV. You have narrowed down to 2 options (all figures are fictional):
- One is a 36″ model costing Rs. 35,000, and
- Another is a 50″ model costing Rs. 65,000
You are confused, and are tempted to choose the costlier model because of its size.
Can we try applying our principle to this situation?
- Cost of the first TV = Rs. 35,000 / Earnings of Rs. 251 per hour = 139 hours
- Cost of the second TV = Rs. 65,000 / Earnings of Rs. 251 per hour = 259 hours
The first TV costs you 139 hours of your work – in other words, you would need to work for 139 hours to earn for the first TV. Similarly, you would need to work for 259 hours to earn for the second TV.
Example 2
You want to go out for dinner with your spouse and kids. If it costs you Rs. 1,000 , each dinner in a restaurant is equivalent to about 4 hours of your work time. That’s 2 hours of fun costing you 4 hours at work. Would you still want to eat out that often after knowing this?
Conclusion
You may or may not change your ultimate decision based on this principle, but it surely gives you a completely different perspective to look at your purchases!
I found this principle quite thought provoking, and would be exploring it further.
What about you? What do you think about it? Is it practical? Do let me know your thoughts through your comments. And if you liked this article, do share it with your friends and family on Facebook / Twitter / Google +.
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