Nothing is Free

Everything, I mean everything costs. You may not be able to associate a dollar figure with it but it costs you time and energy. Are you spending resources on something that is of value to you? Do you have a dream? I hope so! Do you have a plan to accomplish that dream? You need one you know. No great dream and few middling ones were ever accomplished without a plan. Part of a good plan is a cost estimate. You need to count the cost before you pursue your dream. Knowing the cost helps you stay on track. Knowing the cost helps you prioritize life’s activities.

Effective Cash Rate

Try this technique to help you measure the true cost of goods, services, and activities. I call it the Effect Cash Rate (ECR). Take your last pay stub and divide your net pay by your gross pay. Most likely, you will get a decimal fraction between .7 and .99. If you give 10% to your church and another 2% to charities, on average, subtract .12 from the number. Here’s an example, Myra divided her net by her gross and came up with .9042. We’ll drop the last 2 digits and just use .90. She regularly gives to a variety of charities a total of about 13% of her weekly income So, .90 - .13 leaves her with .77.

Using the ECR

Myra’s dream is to spend a month in Paris studying the architecture of Notre Dame de Paris and visiting the local museums. She’s calculated her total travel and living expenses to be $6,750. So how much will it really cost her? She takes 6,750 and divides it by .77 and gets 8,766. That’s how much she’ll have to earn to get the money to go to Paris. If she makes $20 per hour she’ll need to work about 439 hours to get the cash she needs. This is above her regular living expenses. Every Friday she goes out with friends and spends about $75. Now that she knows her goal and her costs she takes that $75 and divides it by .77 and gets about 98. She shares her dream with her friends and decides to go out only twice per month, thereby saving her $150/month. Using this method she evaluates her purchases for clothes, food, and services. Every dollar Myra saves or spends is really worth about $1.30 (1 divided by .77).

Myra is determined to get her trip to Paris and now she is armed with the analytical tools to help. With the 2 free Friday’s a month she takes a part-time job at a restaurant that pays $15/hour and gives her a free meal. The 8 hours at $15/hour net her about $92 in cash (8 times 15 times .77). However, the free meal saves her from having to buy dinner. If dinner normally costs her $8 she is really gaining $10.38 (8 divided by .77). So, in this case, the part-time job is worth 92 + 10.38 or $108.38 per week or 216.76 each month.

Don’t be Too Analytical

This method is not exact and there are other variables to consider. If the part-time job required special clothing or extra travel expenses they would have to be figured into the total. The point is not to go totally anal about the precision of the effective cash rate. The goal is to give yourself a reasonable tool to help you quickly evaluate expenditures and income. Myra didn’t give up all social activities. Had she completely given up her Friday nights she could have built her cash reserve much faster. Had she kept all her Friday nights she could still achieve her dream but it would take longer. There are no cops to throw you in jail if you are driving to slow on the highway of dreams. How long it takes to get your dream is up to you. So, make a plan and get busy.

This entry was posted on Monday, April 14th, 2008 at 1:15 pm and is filed under Tight Spaces. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.