How to Figure Out the Real Cost of Everything You Buy

Do you ever think about the real cost of the things you buy before you make a purchase? Your true cost is more than just the dollar amount on the price tag.

And no, this isn’t the point where I tell you to stop buying those precious daily lattes. You do you.

Besides, I already wrote about how reducing the frequency of your daily habit can actually improve the pleasure you get from those lattes AND save you tons of money in a separate post.

Today I’m talking about a concept that I first read about in the book “Your Money or Your Life” by Vicki Robin and Joe Dominguez (affiliate link). This cult classic was my (and many other FIRE enthusiasts’) introduction to the FIRE movement.

In the book, the authors talk about how to calculate and evaluate the “real” cost of the things we buy. It’s a concept that I’ve since implemented in many of the money decisions we make.

The real cost of everything you buy

When we want to buy something, we must exchange money for that good or service. But the sticker price on what we buy is rarely representative of our real cost.

Money doesn’t grow on trees. We get money by trading our time or “life force,” as the authors refer to it.

The real cost of what we buy is actually the amount of time or effort that we had to trade to get those dollars.

Time is a finite resource. Because we never know how much more time we have left, time is precious.

As such, it’s important to consider how much time we’re giving up when we purchase something… and whether that exchange is worth it.

How much is your time worth?

Well that’s a bit of a loaded question, isn’t it?

If you know that you are nearing the end of your life, you might assign a higher value to your time than someone who is young and carefree. There’s really no accurate way to put a dollar amount on your time.

However, for the purposes or this exercise, we’re going to keep it simple and objective. To do so, we’ll assign a value based on the amount of money we earn per hour.

Step 1: Determine how much you are paid for your time

This might seem like a simple task on the surface, but there is nuance involved.

In order to assign an objective value to our time, we consider the amount of money we bring in per hour of time we work.

Because the value is tied to our income, my real cost of buying something will be different than your real cost of buying that same thing. And our costs will be different still from the true cost of buying that item for someone like Elon Musk.

In my new part time, remote job, this analysis is fairly easy. I primarily work from home and receive an hourly rate, from which taxes are deducted. I have no other benefits or costs. After taxes, my real hourly income from this job is around $45 per hour.

If you are salaried, this calculation becomes a bit more complicated. You may need to guestimate the hours you work in a year if you aren’t in a job that requires you to track your time. This could be estimated working hours, less holidays, plus commute time. You should probably also factor in any bonuses or other monetary incentives.

If you have a commute or are required to keep up a fancy work wardrobe for your job, don’t forget to deduct these additional costs and hours when calculating your true hourly rate.

We also can’t put a price on non-tangible pros and cons of our job, such as high stress or recognition, but these are things that we should still regularly reflect on and consider in step 3 below.

Step 2: Compare the cost of planned purchases to your real hourly wage

Before taking out your credit card to buy something that you don’t really need, do the math.

Calculate how many hours of your time that item or service will cost you.

For example, my fancy Vuori sweatpants definitely fall into the “want” category. I already have plenty of clothes. Each pair cost me around $85, which equates to about 2 hours of work.

A designer bag at $5,000 would cost me 111 hours (or almost 3 weeks at a full-time job).

Both of these would have “cost” me a lot less time at my old job, where I was making six-figures. However, now that I don’t work in Corporate America, I find myself naturally spending less money.

For small regular purchases, like that daily latte, you may want to calculate the cost over a longer period of time to truly gauge how you feel in the next step.

Step 3: Consider if the trade off is worth it

The final step is to consider whether the required trade off is worth it.

This is something that only you can decide. It’s a way to think through what we’re really trading for the the items we buy.

For me, the two hours of work it requires to buy my seemingly overpriced sweatpants is totally worth it. I wear them on a regular basis and they are incredibly comfortable. In fact, I’d trade several more hours of work for them. The designer bag, not so much.

Another way to think through your true cost when considering clothes or other multiple use items, is to evaluate the cost per use. For something that you wear every day or week, the cost per use will be much lower than something you will only wear or use occasionally, such as a ballgown or tux.

This strategy is also useful when comparing two or more options, especially for expensive items like cars or homes. How many more hours of your time will the more expensive option “cost” you and is it worth it?

Although I still occasionally go through this process before making decisions, I now primarily use it for larger purchases given where we are in our financial journey.

Sometimes, this analysis gives me an excuse or permission to indulge (like my sweatpants). Other times, it helps us to overcome the hurdle of a more expensive option that we know is probably a better choice. For example, when we remodeled our kitchen a few years ago, we had a 3-year old and were both still working full-time. Although the remodel would have been much cheaper if we had DIY’d it rather than hiring a general contractor, we didn’t want to devote the extra hours or deal with the added stress of taking it on ourselves and being without a kitchen for months. At the end of the day, the estimated cost difference was only about an extra week or two of work at my job, so I just pushed out my quitting date to feel better about the decision.

Hidden costs and limitations

Clearly there are limitations to this approach.

As mentioned above, you can’t really put a monetary value on your time. Time is priceless.

Additionally, there are other costs to consider, such as the non-monetary tradeoffs required to make more money. If you are working a job you hate just to make enough money to fund your lavish lifestyle, there’s something to be said about spending less so that you can afford to take a job with lower pay that you might enjoy more.

We should also consider the opportunity cost of the money we spend, which is something that you’ll see frequently discussed in the personal finance community. Opportunity cost is the value of the next best alternative, or rather, what you could have done with that money instead. This is where the “latte factor” comes from. It’s important to consider opportunity cost, especially for regular purchases. However, that too has it’s limitations, as we can’t defer every purchase in life in favor of investing.

Overall, this strategy is just one of many available tools to help you think through and (hopefully) make better financial decisions.

Regularly evaluating the “real” cost of the things you buy will help you to spend your money (and time) wisely.

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