Good morning! Today I have teamed up with a few other blogs around Shannon from The Heavy Purse to help promote Financial Literacy Month. What is financial literacy? According to Wikipedia,
financial literacy is the ability to understand how money works in the world: how someone manages to earn or make it, how that person manages it, how he/she invests it (turn it into more) and how that person donates it to help others. More specifically, it refers to the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.
So basically, it is about knowing about money. I am not an expert, but early on, I discovered something very important: to spend money, you need to make money. Duh, right? And to make money? Goodness gracious, you need to work!!
If you have been reading this blog for a while, you will know that I am a confessed procrastinator, borderline lazy. While I am ok to work for my money, I would hate to have to work any more than required to obtain the same thing for a bigger amount of money.
Here is an easy example. Imagine you make $10 per hour, and you want something that costs $100. Ignoring taxes and stuff, you would need to work 10 hours to get that thing. With a little research and an internet coupon, you could even get a discount and get that very same thing for $90, which means you would only have to work for 9 hours to get it.
That is how I approach finances. Trying to pay the minimum amount of money for a product that fits my requirement. This will not generally be the cheapest item around. I like a sturdy, reliable product that will last some time and for this, I am willing to pay a premium. Why? Put simply, it goes like this: if you buy a $100 cast iron skillet with a lifetime guarantee, you will use that skillet for the rest of your life. $100 upfront will get you 50 years of use, and end up costing $2 per year. If you buy a cheap $25 skillet but have to replace it every three years, after 12 years, you will have spent the same $100, or over $8 per year, and still need to replace the skillet once more!
So back to the $100 item you want. If you put it on credit, and only make minimum payments on your card, you will pay it off over several months, or even years. Quite convenient, I admit. But it will cost you much more! With the interests on cards sitting in the high teens, the $100 item will end up costing you $125 or more, meaning you will have to work for 12 1/2 hours instead of 10 to get the very same benefit out of the very same product. Who would want that?
This is why I care about financial literacy. Because you should never have to make any more effort than needed to get an item you need. The extra 2 1/2 hours you spent paying for that item are completely lost. You got nothing in exchange. You just went to work to pay off the interests.
An interesting exercise to help you put things into perspective is calculating your real hourly wage. You make $10/hour, 8 hours a day, but spend 1 hour commuting, 1 hour blowing off work related steam, that is a real 10 hours spent to make $80, bringing your hourly wage to $8 per hour. Your lunch hour is probably lost too, there is the cost of commute, taxes, car depreciation, daycare, work lunches, buying clothes for work or chipping in for your coworker’s 5k charity run.. all this may bring your real hourly wage even lower.
You are no longer working 10 hours for a $100 product, but 15 hours if your real wage comes down to $6.5/hour.
If you are aware of that, you can make an informed decision when deciding to buy something, forego the purchase or skip it altogether. Knowing about where money comes from and where it goes each month is the first step. Making deliberate choices to maximize your fun money and fund your long term goals is the next one. And before you know it, you will have more freedom, more time, and more money.
Why do you care about financial literacy?
This post was featured in Money Bulldog, thank you!
Good post, Pauline! 🙂 I definitely agree that some items are worth paying premium for, but not by using a credit card. I love calculating the real cost of something, as it`s so important to know what something might actually end up costing you.
thanks! there is much to an item than just the price tag indeed.
I try to buy the more expensive version of a product if I know it will last way longer than the cheaper one. For me, it’s worth it to pay a little more up front for something that will last a very long time rather than something that will break or wear out quickly.
the whole different between cheap and frugal. I try to buy the best I can afford as well, unless I know I won’t use the product much anyway.
You make a good point about the iron skillet. I care about financial literacy because money equals time. And since we only have so much time, I’d rather be able to maximize my time by being able to do what I love. So, in this sense investing and saving will allow me to maximize the time that I don’t have to earn money unless I want to.
Money buys freedom, not stuff that ties your more to the need of money. But go tell that to a student holding a first paycheck and he’ll laugh in your face.
I love the way you look at things, Pauline. “Because you should never have to make any more effort than needed to get an item you need”. This is going to be our new mantra – thank you !
haha, the lazy money mantra! thanks Laurie.
Great points, Pauline. It’s definitely important to realize that we need to sacrifice time to get things that we want and need. If we can stretch our dollars (or euros…or whatever currency you use) we can literally have more time. That’s a great reason to pursue financial literacy.
I wonder why so few people really value time. “I have to go to work” “I need to work 40 hours per week” are never valid answers if you don’t think long and hard about why you want to work so much. If it is to buy stuff to forget your job makes you miserable, that is not a good answer.
I never thought about calculating your hourly wage like that. To make matters worse, I actually have never bothered to calculate my hourly work wage, I just know what I get paid at the end of the week.
You get paid for the sacrifice of leaving your house and your family and giving hours of your life to your boss. If that amount wasn’t worth your time, you would stay in bed.
Good stuff here Pauline. You’re stingy like us – one more reason we like you! I love the real hourly wage exercise! I’m gonna have to try that on myself today.
The numbers can be pretty depressing, especially if you need the 2nd car just to go to work and could do with one otherwise.
Very interesting thoughts. This is the wise decision to purchase good quality stuff. Financial literacy will not only tackle on the price of what we are buying but it also includes the service value and durability of it.
I
yes, you need to consider both to make an educated decision.
Good post Pauline! So few look at finances in this way and just make the buy decision. Then, they really end up paying for the decision in the long run. I care about financial literacy because I want to teach our kids how to handle money so they can have a positive impact for the future.
they sure will!
Financial Literacy is all but gone from the American school systems. It used to be that you learned some elementary personal finance in the middle school years. Today, it is a rare graduating senior that has the slightest idea on how to write a check or worse yet, make an entry into a checkbook register!
it is sad because it could make such a difference if seniors didn’t rush to college to get a credit card and student loans.
It’s sad and scary because these graduating seniors, who know so little about money, will some day be our leaders.
Well put Pauline. I liked how you put this into some easy things to understand. I am always trying to get the same thing for less. I work hard, but no one wants to work harder for the same thing. That is just crazy. We have to get our money to work harder for us, not the other way around.
we sure do. and buying stuff on credit (other than a house and maybe a car) defeats that purpose.
You are so right! When you relate each purchase to how many hours you had to work to afford that purchase it puts things into a whole new perspective and it really helps you to determine how important that purchase is to you.
Putting things into perspective is good because on a $2,000 salary you could consider that $50 is not a big deal, yet it is half a day of work, or even more if you take into account your real hourly wage.
Great post Pauline! I care about financial literacy because I want to give my daughter everything necessary to succeed financially in life, and hopefully not make the same mistakes as Mommy 🙂
She won’t because you will teach her well! The guest post I ran from Eva at teensgotcents.com last week was great since her mother was not on the right track financially yet she raised a very smart teenager once she got her financial life together.
I also appreciate value over “cheap.” Looking at the crowds at Walmart, that’s a lesson that many could learn.
Walmart has such a wide range of products I am sure I would find some items where I don’t mind cheap (basics like flour, sugar…) but sure, we are used to trying to buy the cheapest stuff possible and it isn’t always a smart move.
“I like a sturdy, reliable product that will last some time and for this, I am willing to pay a premium.” This fits well with the post I have today that looks at what consumers quest for the lowest prices has done to wages and quality.
The irony of my wages is that the project that pays the most is also the closest, while the lower paying jobs are all farther away. So when I have to work at those other projects, my pay drops by nearly half!
Wow, half price for the same job, at least you do consider the real hourly wage, some workers don’t think about the cost of gas and time to get there, then wonder where the money went.
Loved this post Pauline! I always enjoy reading other people’s rationalizations about spending money and it seems you and I think quite similarly. When I’m planning a purchase I usually calculate the amount of working hours I have to invest in order to buy said item. Even a cup of Starbucks coffee could be costing me about 25 minutes of my time, worth it?
Thanks Erin! I used to consider that the time spent in entertainment had to be at least the time I worked for it. If you take your Starbucks on the go, and routinely drink it in your car, not worth it. If you spend two hours in the coffee shop meeting with a friend, worth it. And so on. Now I rationalize more in terms of personal enjoyment. A $50 diner with friends, worth it, once in a while, but $10 drinks with friends will bring the same enjoyment, so why not go just for drinks most of the time.
I always glaze over at your calculations of stuff. You always put so much thought into it. I’m kind of anti-numbers, even though I’m a pf blogger. lol! For me I focus on things I don’t need necessarily…becoming more frugal, while at the time time earning more. You my friend are more of a bigger picture person than me, which is commendable. 🙂
Mind you I am not a big number buff and most of my calculations are rough drafts of “let’s assume and leave XYZ out of the equation”! The approach of going with unnecessary expenses is good, once you think long and hard about what is necessary and what is not. I have heard “I NEED a $50 night out every night because I work hard and deserve some chill out time”, “I NEED a new car because I need to live a little at my salary level”, etc that are not real needs if you are $100K in debt.
Great post, and very practical examples. It’s kind of depressing to think of your hourly wage in terms of the additional costs and time attached to it, but it’s the truth!
Thank you Anna, yeah, it is not fun to face reality sometimes, the post I linked to about real wages shows that my sister makes a real $350 per month at her full time job. Yet she sees a $1,800 check coming in every month and thinks it is cool to bring the bacon home.
I just realized that I’ve read your post and tweeted about it, but forgot to comment. 🙂 What can I say? It’s been a busy day! I love this post and why financial literacy matters to you. When you break down how much you really earn – it does make you think twice about how you spend your hard-earned money. “You should never have to make any more effort than needed to get an item you need.” – is a philosophy more us need to adopt to make sure the money we earn is working for us.
I imagine it was a busy day! Hope it opened a few more eyes, that is a great cause.
I’ve read a few posts on this today but I have to say Pauline this is my favourite. The points you bring up are the pillars of financial awareness and are the building blocks for a stable financial future. Now I just need to find a way to get my kids to understand in future!!
thank you Adam! If you teach your kids gradually they will surely get it.
Definitely agree with you here about the true wage earned. So many people don’t realize how much time they spend on work and how little they are making.
On some items, it’s really tough to know the correlation between price and quality. You know what I mean?
Yes, some stuff I will rarely use I don’t care if the quality is poor, and things like flour or sugar I don’t even see a difference in quality when buying the cheaper stuff. But those things are cheap anyway, it really matters when the purchase is important.
Borderline lazy? Nope, you just figured out how to work smarter not harder. Something I am learning to refine myself. When our new doctor started, he used to save all his charting until after all the patients were done, and he was there for an extra hour or two, something I used to be guilty of myself. If you can learn to chart real time, you can leave right on time. You don’t get paid for that extra time, so learn to do it smarter, getting the same result in less time.
Exactly, except if it was a normal office people would say “oh, look at the slacker leaving on time, I am working an extra hour every day”.
You’re very right — looking at the true cost of things is so important and I like your perspective of moving away from looking at money as a nebulous concept, but rather something that is earned by time and effort.
unfortunately, money doesn’t come from nowhere! If you value your time you should value money a lot more, since it buys free time.
I think it’s interesting how you equate buying power with working power and how much you can save in terms of hours spent. I’ll admit I do the same thing and if I can find a way to make it cheaper thus less work I’m in. Financial literacy encompasses so much but we all interpret it a different way, a personal way and that’s ok as long as we ‘get it’. Cheers Pauline.
Well put, as long as you aren’t in avoidance you should be good to face your financial future. Goals and living situations are different for everyone so we all approach money differently, that is normal, except for denial.
Hi Pauline… Very interesting post! I never seen this kind of great information in my life. Thanks for sharing with us.
If people were to do the simple math you just explained and were honest about the number of hours they had to work to get what they wanted, they would think a whole lot more before a purchase. I don’t want to teach 6 guitar beginners for a year to pay for kitchen remodel, but I’ll do it for a hiking get away or new laptops.
and it is even worse when you put it on credit, then feel every hour passing by just to pay for the kitchen remodel, which novelty wore off months ago..