Bankruptcy Facts, Repair Credit after Bankruptcy, Philip Tirone

In recovering from a major financial meltdown, the bankruptcy facts are this: 1) you must stop spending money—or at least as much money—and 2) you must save money.

Though the recession probably has taught us all a lesson about savings, the truth of the matter is that Americans enjoy relative wealth. Even after a bankruptcy and during a recession, many of us pay people to cut our children’s hair, make us coffee, and wash our cars—all things we could do on our own. Twenty-somethings walk around in $230 designer jeans.

If you have declared bankruptcy, you probably need to shift your mindset so you can stop spending money and making rash purchases. Learning how to create a budget is important, but cutting back on spending alone is like taking weight loss pills—once you stop taking the pills, the pounds come back. Once your finances rebound, spending might increase.

But if you adopt the Hour Factor™ mindset, you can stop spending money and start saving money.

The Hour Factor™ works like this: Instead of looking at the price tag of an object to determine its value, look at the number of hours you must work to pay for that item. A $400 gadget costs you more than 24 hours if your after-tax hourly wage is $16.50.

The only true measure of an item’s value is this: How many hours will you have to work to pay for the item? And if you want to stop spending money, you must stop thinking in terms of dollars and cents. Instead, shift your perception to consider the hours you must work and the opportunity cost of each item you buy. In doing so, you can help prevent another financial meltdown.

For instance, that $230 pair of luxury jeans has an Hour Factor of 35 for a person who makes minimum wage. For an attorney who makes $250 an hour after taxes, it has an Hour Factor of less than one.

Is a pair of jeans worth 35 hours? Is it worth even one hour if you cannot afford your child’s health insurance or college tuition?

Only you can answer this question.

They trick to stop spending money is twofold: First, begin associating purchases with the amount of time you must work to secure them. Next, consider the opportunity cost associated with each purchase. To stop spending money and start saving money with the Hour Factor, go through this process:

• Determine how much money you make hourly after taxes. If you are paid hourly, this calculation is simple: divide your take-home pay check by the number of hours you worked in that pay period. If you are paid a salary, divided your annual after-tax income by 2080 (the number of hours a full-time employee works in one year, assuming a two-week vacation). Remember that this is after-tax income!

• Relate all spending to your hourly wage. For instance, let’s assume your after-tax hourly wage is about $16.50. If you are going to buy the latest $200 cell phone, divide its cost by your hourly wage to determine the Hour Factor. Ask yourself this question: “Is this cell phone worth 12 hours of my time?” If it isn’t, stop spending money and save your hours for something more important!

• You must also know the hourly cost of your weekly expenses. Let’s say that after you pay all your expenses—rent/mortgage, car loan, insurance, utilities, groceries, and the like—you have spent 20 hours. If you work 40 hours, this means you have an additional 20 hours to “dispose” of. Your disposable hours can be used to purchase things, or it can be saved or invested. When we put this in terms of time, you can begin to see that you are “disposing” of one about hour of your life when you treat your friends to $15 of coffee drinks. You are disposing of five hours of your life when you splurge on a lavish meal complete with appetizers, dessert, and drinks. Having this perspective should help you to stop spending money and start saving money!

• Finally, to stop spending money, consider the opportunity cost for each of your purchases. Once you have determined the hourly cost of a purchase (12 hours, in this example), ask yourself a series of questions.

1. “What else could I buy with 12 hours of my time?” These 12 hours could be directed toward health insurance, a car payment, or a vacation. Or, you could stop spending money entirely and save the money in a retirement account or put it toward your child’s college tuition. This brings us to the second question.
2. “What investment and savings opportunities am I losing by disposing of 12 hours?” Consider, for instance, that your goal is to purchase a home. You know that you must save $60,000 for the down payment on a $300,000 home. Assuming you make $16.50 hourly, you must save about 3,640 hours to afford the down payment. If you saved each of your disposable hours, you could afford the down payment in about three years and six months years if you have 20 disposable hours a week.

Or, you can buy that cell phone, take a lavish vacation, and splurge on expensive dinners. It’s your choice, but I suggest you stop spending money and start saving your hours!