The term Money Illusion evokes those distortive mirrors you find at your hometown fair’s makeshift haunted house. The kind that stretches you out like Yao Ming or makes you rotund like Elmer Fudd. But when it comes to your actual money – the illusion is way less obvious.
Money Illusion is a behavioral bias that gives many people “the illusory picture of their wealth and income based on nominal dollar terms, rather than real terms.” It typically involves inflation, where your savings interest rate (of say, 1%) might not outpace the rate of increase in your rent, gas, and other basic needs. When the latter outpaces the former, you’re typically worse off. But it may be hard to catch because the slight increases are not acutely visible.
The illusion can be even sneakier; “experiments have shown that people generally perceive a 2 percent pay cut in nominal income with no change in monetary value as unfair. However, they also perceive a 2 percent rise in nominal income, where there is 4 percent inflation, as fair.“
So we’re faced with a challenge. How do you make the invisible visible and adjust for the true economic impact?
Are there any other places in our lives where invisible factors obfuscate the true value of a good or service? Let’s think about our wages. What would one’s hourly wages look like if you adjusted for invisible time (travel, weekend work, and commuting) and invisible costs (commuting, Brooks Brothers shirts you’d never wear IRL, and meals)? Here’s a nifty calculator to set that pesky Money Illusion straight.
Money is your Life Energy
Vicki Robin’s book Your Money or Your Life lays out an eye-opening exercise to calculate your “Real” Hourly Wage. In the book (the de facto bible to the FIRE movement), Robin defines money as “something we choose to trade our life energy for.” She expands on this concept in her blog:
Our life energy is our allotment of time here on earth, the hours of precious life available to us. When we go to our jobs we are trading our life energy for money. You could even say that money equals our life energy. So, while money has no intrinsic reality, our life energy does — at least to us. It’s tangible, and it’s finite. It is precious because it is limited and irretrievable and because our choices about how we use it express the meaning and purpose of our time here on earth. Money is something you consider valuable enough to spend easily a quarter of your allotted time here on earth getting, spending, worrying about, fantasising about or in some other way reacting to.
Your “real” hourly wage calculator
But before we trade our life energy for money in the form of work, Robin emphasizes the need to set our Money Illusion straight. And that requires understanding our “real” hourly wage.
But before we dive into the spreadsheet, some words of precaution. The purpose of this calculation is one of inquiry (or as the spiritual woo woos would say, discernment). Approach this spreadsheet with curiosity, inquisitiveness, and self-compassion. Leave the feelings of sadness, grief, nostalgia, hope, guilt, shame, embarrassment and anger at the door. This mindset is critical and Robin adds that it goes a long way towards lightening “the physical and emotional loads you’ve been toting around for years.”
How to use the Spreadsheet
First, start off by making a copy of the template (so that you can modify it).
Next, complete the income, time, and cost sections by inputing your values into the tan cells (with blue text). Pay attention to the instructions in italics to ensure the accuracy of your measurement units and time periods.
Show me the money!!!
The spreadsheet is dynamic; as you input new values, the summary section will update automatically.
Now as you evaluate the result, consider the following questions:
- Did any part of the exercise cause agitation? Does it invoke feelings of the scarcity mindset or “not enough?”
- Within your existing situation, how might you increase the “real” wage?
- Does your “real” wage impact your sense of financial security?
- Does knowing your “real” wage impact the way you think about budgeting and spending?
- Is your spending in alignment with your money values?
- Do you see any opportunities to spend money to buy back time?
We’ve got frameworks to answer each of these questions in our digital Workshop The Fulfilling Path to Financial Independence.