Min Hus is doing an online YMoYL book club. Totes check it out. This week they’re on chapter two, calculating their effective wage– the idea of converting the cost of stuff into life energy that’s expended so you have a better idea of whether or not that stuff is actually worth the price.
Economists do this all the time– our effective wage rate includes not only the cost of things you buy in order to get to work, but also the unpleasantness or disutility of the work. We make assumptions that wage rates are higher when the costs and disutility are higher. We call these compensating differentials.
But we also value money in terms of how much of one good you have to give up by buying another good. Money is simply fiat– something that allows you to buy goods and services. You have a budget constraint and that means you can only buy so much of everything. If you buy X widgets, you can’t buy as many sprockets as you would be able to if you hadn’t bought any widgets.
Folks who aren’t economists (or who aren’t economists *yet*) also use these kinds of metrics to get at the idea of how much their money is worth– what they have to give up if they buy one thing instead of another. Specifically, this comment by Debbie M about how she used to measure purchases in terms of how many boxes of macaroni and cheese she could buy reminded me of how I determined whether or not something was worth purchasing during most of my childhood.
I was really into the candy-bar metric. When I started it was 3 candy bars = $1. Later it became 2 candy bars = $1. (My allowance was pretty small by national standards according to my Penny Candy (?) magazine– 10 cents per year of age. I couldn’t imagine people who got the average allowances worth 10 candy bars/week. How did they eat all that candy?) I’m not really sure how much a candy bar costs these days. :|
Later, through college and graduate school (after we got rid of DH’s debt– there was no need to buy anything because the answer was always “no” until that was gone), my general metric was 1 meal out = $5. Everything was calculated in terms of a meal out.
These days I don’t really do that anymore. Pretty much anything I want under $200 I just buy. (Which makes it sound like I’m a spendthrift, but my natural inclination is not to buy anything, so when it gets to the state where I want it now rather than sticking on my Amazon list, I might as well buy it. Mainly it means I don’t stress at 3 figure grocery bills.) I don’t know what I *would* use for an appropriate metric these days. Maybe time to mortgage payoff (though Debbie M was not impressed with that idea!). When I was thinking about flying DC’s relatives out here, I calculated how much tuition the flight would pay for (answer: a full semester at CC), and just put that money in a 529 instead.
How do you figure out how much a dollar is worth? Do you have a metric like this where you trade off in terms of salary or in terms of other goods you can purchase? Have you had such a metric in the past (or would it help you in the future?)
Grumpy Rumblings (of the formerly untenured) 
March 19, 2012 at 4:23 am
We have a gogo crazy bones metric. I even used it a couple of weeks ago, when my son proclaimed he found a house that he liked. I had to explain to him buying that house at it’s asking price would be like paying $3 for a pack of gogos, when you can buy them elsewhere for $2. He totally got it when I explained it in terms of gogos.
March 19, 2012 at 6:03 am
First off, where are you getting a meal out for $5?
I don’t think that I have ever explicitly thought of cost of items in terms of a cost-of-something-else metric. But, when I was working jobs with hourly wages, every purchase would be thought of in terms of # of hours of work, which dissuaded a lot of spending.
March 19, 2012 at 6:11 am
Grad school was a long time ago, but generally the sandwich shop. The tea place also had bibimbap at that price.
March 19, 2012 at 7:06 am
I don’t have a dollar metric. What I try to do is avoid purchasing things I think that I will not find valuable in 3 years. Although this can be difficult to pin point in reality. It does help to eliminate unnecessary purchases. I helps, but I still end up with things that I don’t use.
March 19, 2012 at 10:24 am
I don’t have one either. I’m honestly not even sure how I’d come up with one that would be important to me.
March 19, 2012 at 10:38 am
I found that having a dollar metric or “magic number” as I’m calling it is beginning to help rein in my spending. I wonder if this will be a permanent change or if I’ll go back to my old ways once the shock wears off, as in shock at how little I actually make once I factor in commuting and work-related expenses.
March 19, 2012 at 10:57 am
Hm. I haven’t done this before, but I love it. Maybe I’ll do it in fractions of a plane ticket. I’m getting some home town cabin fever.
March 19, 2012 at 11:10 am
The only time in my life that I can remember using a metric like this was when we were prepping for our four month circle pacific trip. We’d figured out that our average daily budget was about $65 (southeast Asia is CHEAP, which offset the not so cheap Tahiti and Australia). So, everything was measured in terms of a day of travel.
In the end, we came home with extra money still in the bank, though. So our metric was imprecise.
March 19, 2012 at 11:11 am
My metric, when I use one, is time based. Usually, how many hours of my life does it take earn the money to pay for it. In the old days it was “is this pair of shoes worth X hours of my life”? More often now it is “is it worth it for me to pay X to free up Y hours of my time.
March 19, 2012 at 1:39 pm
I’ve ever used a metric either, which is why the real hourly wage example from YMOYL will come in handy. Being able to determine a purchase’s worth to me based on how long I have to work for it should be helpful.
ps. Thanks for another shout out!
March 19, 2012 at 2:42 pm
I can’t recollect ever having a metric like that for any long term financial goals, but they do work for my shorter term ones. When I was saving money to build up my emergency fund, I was very conscious that every dollar spent on non-essentials was a dollar that didn’t go into savings. Similarly, when saving for a vacation I’ve thought the same thing (“I’d rather save the money for a trip to Iceland than spend it on yarn/cocktails/clothes.”) Now that my vacation fund and “big goals” savings funds have grown, I think about investing some of that money…but I also dream about continuing to build it up and using it for an over the top trip, like a month long cruise up the west coast of Africa (for a mere $30k) http://www.expeditions.com/Itineraries45.asp?Expedition=755&Destination=325
At this point I’m pretty comfortable with my savings, but I doubt I’d change the metric to accelerated mortgage payoff either. I know that paying a mortgage off early gives one more financial freedom, but I’m always going to be paying *something* towards housing, so a super early payoff just doesn’t resonate with me. I pay extra so it will be paid off in 20 years rather than 30, but that’s accelerated enough for me.
I followed the link to the post and it was very interesting reading the comments. I’ve never read YMoYL despite picking up a copy at the used bookstore last year because I’ve heard how awesome it is. For a person who gets well compensated for work and doesn’t have a lot of expenses associated with it, that calculation of true wage is tricky. More than one of the commenters pointed this out. After all, unless my financial situation becomes desperate, I’m going to take a vacation so I’m not sure why I would subtract the money spent on vacation from my income. Also my “de-stress” time is usually something low cost and productive like gardening or reading free or very cheap books, and I’d likely keep doing these things even if I did change jobs. I’m not sure what the point of those calculations are, unless they are targeted towards people with substance abuse or addictions (like shopaholics or people who spend a lot on liquor and tobacco to “de-stress”).
March 19, 2012 at 4:44 pm
Obviously different things will enter into different people’s calculations as pros or cons… some people like travel, some don’t, some will travel more when working, some less, and so on.
Personally I think I need more money while unemployed rather than less because work keeps me busy. I would need to live somewhere more expensive if I didn’t have work. That can go into a calculation so long as you know the size and direction. As an economist, I look at those calculations and say, ah yes, they’re explaining the idea of compensating differentials and the idea about additional costs to work… you don’t have to use their list, but you can come up with your own.
March 19, 2012 at 6:55 pm
We have a couple of big purchases this year, a car and a house. So I’ve been thinking of purchases in terms of months of work. This comes in particularly hand when negotiating on a house as in, ‘if we offer this price that saves us x months of work’. As a side note, I found when I made the switch from thinking about homes in months of work rather than the amount of a mortgage payment, I started wanting a much less expensive house!
March 19, 2012 at 7:04 pm
Good idea!
Bad for us, we did years of work… oh, this house is only 3 years of salary… as if all we did was pay for the house rather than say, eat etc.
March 20, 2012 at 7:38 pm
I’m famous!!
Ahem.
I was just thinking that I am also thinking in terms of months of work lately, but more for earnings than for expenditures. I have 70 more months until my pension kicks in. Each (pared-down) month costs $1503. My new half-time job pays about $1221.30/month, which is not enough. But for each month I work, I get to add 4/5 of a month to the date when I run out of savings.* And then I decide if the working and the commute is worth it for the amount of end-of-savings postponement I get. (Since my new job is fun and possible, I commute only three times a week, and I still get to play a lot of hooky, the answer is yes, indeed, it is.)
*Sabbatical/early retirement savings – I’ll still have other savings left.
March 19, 2012 at 8:58 pm
I don’t have one either. When I was in early college years and worked at a retail store, I measured some stuff in t-shirts and sweaters. In late college on study abroad, I measured costs in terms of plane tickets. Now it is just dollars. But I probably should do it in terms of hours, YMYL style.
Also, I posted on this once…. Wow, 4 years ago. Oddly, I remembered :)
http://stackingpennies.wordpress.com/2008/04/24/measuring-price-in-travels/
March 20, 2012 at 12:18 am
I’m like you where I don’t naturally spend money unnecessarily.
Back when I was an intern, I was out dress shopping with a friend and standing at the cashier, we both realized out loud that the dresses we were buying cost us about one hour’s work. I felt bad saying that out loud in front of the minimum-wage earning cashier. At that point, I was earning (gross) about $30/hour and the dresses were crazy on sale.
When debating an in-network or out-of-network health care provider, I will take into account whether one requires driving (gas) and whether the driving route is over a toll bridge and how much my time is worth. I actually determined that it was cheaper overall to see the out-of-network provider with the cost of the toll, the extra travel time, and the distance (gas cost) to the in-network provider.
I pretty much buy anything I want that is under $100 and fits into my spending plan. I don’t generally have a desire to buy random things that cost more than $500. When my old iPod stopped holding a charge, I would have bought a Shuffle with no hesitations (~$50), but I evaluated and realized that I would be much happier with one that actually has a screen (Nano), so I spent the extra $70. One of my coworkers thought I was crazy to think about that $70 because I make a lot of money, so I responded with my usual line of “Just because I make a lot of money doesn’t mean I should spend money without thinking about it.”
March 25, 2012 at 9:06 pm
[…] from Nicole and Maggie: Grumpy Rumblings presents What’s a dollar worth?, and says, “Nicole and Maggie talk about different metrics to conceptualize what each dollar […]
March 28, 2012 at 8:07 am
Please see today’s XKCD! It reminded me of this post!
http://xkcd.com/1035/
March 28, 2012 at 8:09 am
We <3 xkcd!
August 17, 2015 at 1:29 am
[…] For people who don’t use detailed budgets and can wing things because they’re already saving a large portion of their earnings, it may still be useful to compare the cost of things when trying to decide whether to, for example, hire a house-cleaner. This post discusses how to make those kinds of comparisons. […]