What Is Your Personal Profit Per Hour?
Was thinking about some useful household finance metrics as the new year approaches…
From the day anyone starts working, we’re quickly educated on the concept of an hourly wage. Whether we start at minimum wage or otherwise, we’re conditioned to the idea of compensation being denominated in the time interval of hours. Even as many folks transition to being paid on a salaried basis, it’s not hard to calculate what you effectively make per hour. For example, if Bob’s after-tax bi-weekly paycheck is $1,500 and Bob works 50 hours per week, then he makes $15.00 per hour. This example presumes Bob has no other sources of income other than his paycheck.
The household metric that is often missing from the equation is the flipside: spending per hour. The most simple way to calculate this number is to take all of your expenses for a given period (say a month) – mortgage/rent, credit card charges, car payments, ATM withdrawals, utilities, insurance, interest payments, tuition, healthcare, charitable giving, etc. – and do the basic math to denominate that spending on an hourly basis presuming the same “spending hours” as “working hours”. To use the same example, if Bob spends $3,000 per month and has the same 50 “spending hours” per week, then a little basic math says Bob spends $13.85 per hour.
That takes us to the most important metric: profit per hour. Bob makes $15.00 per hour and spends $13.85 per hour which means he makes $1.15 per hour in profit. The reason I prefer the hourly denomination of profit more than a month or year is that it’s more practical for all of those little spending decisions we make every day. Congratulations to Bob for being profitable! Just knowing your hourly profit metric is an achievement in and of itself. But, let’s go on to a couple second order ideas for those interested.
First, you can say that spending hours and working hours are not the same in reality. If Bob spent $13.85 every hour of every day (24 x 7), he would end up spending $10,000 per month instead of $3,000. So, the key to making the math work is to limit your spending hours per week to the same as your working hours per week. If you work 50 hours per week, pick the 50 hours per week where spending is allowed and fix them. It might be 5 specific hours on each weekday and 12.5 hours on Saturday and Sunday. Once that is selected, the question is how much can you spend per hour in those “spending hours”.
To determine how much you can spend in those spending hours, you have to determine how much you have already spent just by existing. Take all of your “fixed costs” – all those costs that you bear whether you ever take your cash or credit card out of your wallet. This could be things like car payments, rent/mortgage, insurance, tuition, etc. Let’s say for a moment that of Bob’s $13.85 per hour of spending, $10.00 per hour is fixed. That means in those 50 spending hours per week, Bob can spend $3.85 per hour and still maintain his profit margin of $1.15 per hour. Now all of Bob’s discretionary spending decisions can be benchmarked against that $3.85 in hourly discretionary spend that he knows he is allowed. That’s a useful metric whether Bob is looking to get that bagel sandwich for breakfast or that fancy steak for dinner.