Discretionary Spending Wage
I had my first job in the summer between my Sophomore and Junior years of high school. I worked at the National Institutes of Health as a programming intern, and I was flush with cash making 10.25 an hour. This being the first time in my life I had discretionary income, I went wild. Everyday on my way home from work I would pass by the soda machine. “Hey, kid,” it would beckon “hey, look, I got this nice and cold Dr. Pepper over here, it’s only a buck twenty five, really nice deal.” I would stand in front of the machine agonizing. “
$1.25 / $10.25/hr = 0.12hr, 0.12hr * 60min/hr = 7.2min… so really, I’m just paying seven minutes of work for this soda. That’s nothing!” And so, the vending machine and my wallet would end the day a little lighter.
It’s tempting to continue to use this logic to justify purchases, especially now that my salary is higher. At $40 an hour that soda is now only 1.88 minutes of my time. Not even worthy of second thought. But this is a flawed method! As every personal finance website on the internet tells you, you have to pay your debts before buying soda. You have to calculate your discretionary wage. It’s exactly what it sounds like. I’ll demonstrate:
I make forty dollars an hour, but I only work twelve weeks a year, during the summer.
12weeks * 40hr/week * $40/hr = $19,200. Let’s estimate I don’t pay taxes (or that I do and I get it all back). My parents pay for my tuition, so that leaves housing and food and necessities. My housing this year will be about $650 a month, utilities are about $50, estimate food at $250, other misc necessities at $150, that’s spending of
$650 + $250 + $150 = $1,050 a month.
$1,050/month * 12months = $12,600 in necessary expenditures. This leaves
$19,200 - $12,600 = $6,600 as discretionary income. I worked
12weeks * 40hr/week = 480hr to make that
$6,600 of discretionary income, so I made
$6,600 / 480hr = 13.75 discretionary dollars per hour. So that soda jumps from 1.88 minutes to
$1.75 / $13.75/hr * 60min/hr = 7.64min, like my high school days! And back then I had no necessary expenditures, so I’m actually in a similar position financially despite making four times as much. I don’t buy as many sodas anymore though…
Here’s the formula. If
e is how much you earn per year,
h is how many hours you work per year, and
n is the sum of your necessary expenses per year, then
(n - e) / h is your discretionary income wage. Easy!