There is a simple calculation you can do to see how many days you spent working for a purchase. Take 260, which is the average amount of work days per year, and multiply it by the percentage of income spent on that purchase.
For example, the average American spends 17.6% of their income on transportation. To calculate how many days the average American spends working for transportation expenses, take:
260 x .176 = 45.76
In other words, Americans work from January to late February to cover their transportation costs.
Here is a breakdown of how many days a year an average American spends working for each expense:
Average Expense : Days Worked
| Expense | Average | Days |
|---|---|---|
| Food | 12.4% | 32 |
| Alcohol | .9% | 2 |
| Insurance | 10.8% | 28 |
| Education | 1.9% | 5 |
| Clothing | 3.8% | 10 |
| Personal Care | 1.2% | 3 |
| Health Care | 5.7% | 15 |
| House | 34.1% | 89 |
| Transportation | 17.6% | 46 |
| Entertainment | 5.4% | 14 |
The chart below helps you calculate the amount of days spent working for your expenses. Calculate some of your bigger expenses first such as food, housing, and basic clothing. Next, calculate the wants such as transportation, travel, entertainment, alcohol, etc…
% of Income : Day Worked
| % of Income | Days |
|---|---|
| 1% | 3 |
| 2% | 5 |
| 3% | 8 |
| 4% | 10 |
| 5% | 13 |
| 6% | 16 |
| 7% | 18 |
| 8% | 21 |
| 9% | 23 |
| 10% | 26 |
| 11% | 29 |
| 12% | 31 |
| 13% | 34 |
| 14% | 36 |
| 15% | 39 |
| 16% | 42 |
| 17% | 44 |
| 18% | 47 |
| 19% | 49 |
| 20% | 52 |
| 21% | 55 |
| 22% | 57 |
| 23% | 60 |
| 24% | 62 |
| 25% | 65 |
Why?
My wife and I are going to be in the market for a new car soon. We both decided a while back that up to 8% of our income can be spent on purchasing a car. If we go beyond 8%, we start to compromise many things that are more important to us.
We have saved 8% of our monthly income in an ING Direct sub-savings account since we started sharing finances. We accumulated enough to upgrade but not enough to get the type of car we really want.
We have a few options. First, we can spend our emergency fund and investments and pay cash for the car we really want. Second, we can stay congruent to our goals and upgrade to a car with the money already earmarked for a new car.
To us, the second option is a no-brainer because we looked at what the car we really costs us. If we were to spend an additional 4% on a car, that costs us 10 days a year or the opportunity to allocate that expense towards something that we actually get fulfillment out of. For example, we can add an additional 4% to our travel budget.
This method is an excellent way to break down big purchases. When you’re in the middle of a bigger purchase, logic seems to get thrown out the window. Instead of thinking about what really matters such as days worked or opportunity cost for that purchase, it’s very easy to get in the trap only thinking about if you can afford the monthly payment or not.
The road to financial success starts with being congruent with your values and goals. If spending 15% of your income on travel, instead of transportation, will make you happier than do it. If spending 5% less on a car, and having to work 13 days less per year makes you happier, than have at it. There are no rules and limits to what you must spend your money on.
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