Three More Money Ideas

This week I have something for everyone. Well, maybe not everyone, but there are some money ideas here for those looking to make more, spend less or arrange their personal finances in more beneficial ways. As usual, it is a mix of the practical and philosophical, although I happen to think that philosophy is very practical.

Found Money

When it comes into your life unexpectedly, we often refer to it as "found money." Sometimes it may be actually found, although if I did stumble upon a hundred-dollar bill, before keeping it I would have to ask around to see if I could discover who lost it. Other sources of found money include inherited money, an unexpectedly large tax refund, winning a lottery or contest, and selling some old collectible toys from the attic on ebay for hundreds of dollars.

What do you do with found money? The most common response is perhaps to spend it on some luxury or frivolity. But if you want to better your situation and pursue more important goals and values, you have other options. For example, suppose you get a $600 bonus from your employer. Why not take $100 of it for fun purposes, and use the other $500 towards credit card debt or to start a fund for investment or a future business?

A $2,000 income tax refund can really help out with important goals. For example, maybe you find yourself in financial trouble several times each year due to an unexpected car repair or medical expense or broken appliance. Why not use that money to fund an emergency account. Put the tax refund in that account every year so you no longer have such stressful surprises.

It might be a good idea to reward your wise "money stewardship" with a bit of play money for your short term pleasure. Just be sure to use the bulk of found money for important purposes. It's a habit that can really better your life.

Money and Personal Psychology

There are times when what is "rational" and what works are not quite the same thing. A simple example is the annual income tax refund that helps so many people pay for big expenses. Any good accountant will point out that it makes no sense to overpay on taxes throughout the year, just to get a refund later. After all, you could have been making interest on that money if you just adjusted your exemptions and took more money home each week.

The problem with this "rational" view is that we are not perfectly rational beings. Yes, if you paid in only what you were going to owe, and put that $1,500 that would have been refunded into a savings account a little each week, you might seven to twelve dollars in interest. On the other hand, if you just ended up spending the extra money as most people would, you would no longer have the $1,500 chunk of money each April to help you out. In other words, though we should look at the rational approach, we also have to take into account our own personal psychology.

Another great example is buying a home. Sometimes, contrary to what most people will tell you, it doesn't make sense from a strictly financial perspective. It may cost several hundred dollars more each month to buy rather than rent. If you put the $400 saved each month by renting into a decent investment, you may do far better than the equity you gain from paying for a home. On the other hand, this ignores an important question: Will you invest the savings? If, realistically, you aren't going to set aside that money, it may be that buying a home works better.

This could be true even if you pay an extra $400 monthly to gain only $200 monthly in net worth. The point is that if you rent you may have nothing in twenty years, but if you buy you essentially are forced to save money in the form of your home equity, and invest in the form of equity gained from rising values of homes. It might be worth considering how to change your habits to follow a more rational course, but in the meantime, don't ignore how you really operate. Take into account the truth about your personal psychology.

What do You Really Make?

Which job you take is rarely just about the money. In choosing you weigh not only the financial benefits, but also the amount of interest you have in this or that type of work. You might even look at the people you will be working with, or the kind of boss you'll have. The money alone isn't the only thing that matters.

On the other hand, the financial rewards are usually an important part of the decision. And when it comes to analyzing this part, most people are not too thorough in their approach. They might just compare the annual salary or hourly wage, for example. They also commonly over-value certain benefits in financial terms.

For example, a single young woman might choose a job that pays $3 per hour less than another because it provides a health insurance policy that she only has to contribute $40 weekly to. She may not realize that this means she is paying $2,000 annually as well as giving up $6,000 ($3 less times 200 hours) annually to get that insurance. The total costs is therefore $8,000. Perhaps she could have taken the other job and found a decent policy on her own for $5,000, thus coming out $3,000 further ahead.

The larger point is that when comparing jobs, we sometimes don't look at what we really net. Another example of this is a man I worked with years ago. He drove 63 miles each way to get to work because the jobs within a mile or two of his family home paid about $2.50 less per hour. I'm not sure about the math at that time, but I doubt he was either. At the moment, with gas at $2.60 per gallon and driving the truck he had then, the extra costs for gas alone would be about $95 weekly. That eats up all but $5 of the gain in wages ($2.50 times 40 hours weekly is $100).

Let me add to this idea that we probably should consider our time to be worth something (I certainly do). This man was spending fifteen hours extra in his vehicle each week. If the net gain from that is $5 he was making about 34 cents per hour for his effort. Maybe he would be better off taking that convenience store job a mile from home and just put in overtime.

How much do you really make? In determining this, and for purposes of comparing your options, look at all the costs of any given job. You want to know how much money you actually will make versus sitting at home doing nothing. So if one job requires that you buy uniforms and maintain them at your expense, take that into account. If another lets you eat for free while at work, take into account the savings on your grocery bill. If you really want to get into the smaller details, you might look at the costs of shaving and more frequent haircuts that a job will require, versus another that will take you as you are.

When the math is done, you at least have a more realistic picture of the financial benefits of each option. Then you can bring the other elements into the mix, like whether you will like this one or that one more. And don't forget to consider which one takes you closer to your goals in others ways, such as opening up future opportunities, providing training you'll need for other pursuits, or allowing you to live where you want to.

A final note about this calculation:

You may not agree, but I consider all of my time to be of value, and so I like to take it all into account when looking at business opportunities (I haven't had a job in years, but the principle is the same). I want enjoyable work, but I also aim for making the most I can for each hour worked. This approach can present a problem for some people. For example, a job that pays $100 per hour may not work for you if it only allows you to work two hours per week. Instead, you might choose to work 40 hours weekly at $10 per hour.

If you really have good uses for your time other than working, you may want to arrange your life so you can take that job with the higher hourly rate. If you budget well and generally live on less than you make, you are freer to look for the maximum return for your time actually spent at work, without so much attention to how much you make in a week or year. This gets me to my formula:

M divided by H equals T

The "M" stands for the total money you expect make from a job, business, or project. This can be looked at annually or monthly, weekly, or on a project basis. Add up all measurable financial benefits in dollar terms. If an employer hands out season tickets for some sports team, and this is worth $100 to you (the normal costs is not relevant to what they are worth to you), add that in. If they're worth nothing to you, add nothing. Subtract all costs, including taxes, uniforms, expenses of driving to work, and everything else that you wouldn't have to spend if you didn't have that job or business. This give you your real net "profit."

The "H" in the formula stands for total hours required. Add all time, including the time you must spend on the phone talking to your boss, every minute spent driving to work, and all the hours at work (including unpaid lunch hours). If you are required to go to company parties, include that time (unless you really enjoy them).

When you divide your total profit by your total time, you get "T," which is your true hourly wage. This is what you really make for your time, and is the figure you need to fairly compare your options. If you budget well and generally live on less than you make, you can choose to figure things this way, without so much attention to how much you make in a week or year. In other words, you can choose that high-hourly-wage activity that doesn't take many hours.

If you make much more per hour, but less for the week due to shorter hours, you have more time to play with the kids, go to movies with your wife, or study archeology if that's what you want to do. Time is the stuff of life, and the more you are paid for that part of it spent working, the shorter you can make those hours and the more time you have for what truly counts.

I should add to that, however, that for some people what really counts is their work, and if they also make a decent wage they get the best of both. That's not a bad goal.

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