Calculating Your Real Hourly Wage
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I’m currently reading “Your Money or Your Life,” a true personal finance classic. As great as it is, however, I won’t be reviewing it here. Instead, I wanted to share their take on calculating your real hourly wage.
While calculating your hourly wage might seem straightforward, it’s a lot more complex that simply saying, “I make $400 a week and work 40 hours, therefore I make $10/hour.â€
When you factor in all the additional expenses associated with your job (some of which may not be obvious), you begin to see the value in this calculation. In my case, my old corporate gig paid a reasonable wage, but when I added up all the additional time spent and expenses required, it really didn’t pay that well.
Adding up the hours
In my case, I used to drive 18 miles to work each day, requiring an extra 60-90 minutes of drive time. The process of getting ready for work each morning required another half-an-hour.
My lunch time, while a break, was still time that I was not entirely “free†to do what I wanted. Since I was not paid for this time, it needs to be accounted for.
The book mentions some other hours that you might also want to consider…
- Decompression time: How long does it take you to get back into the swing of your “non-work†life each evening?
- Job-related illness: Factor in time lost due to illnesses resulting from the stresses of work, etc.
Adding up the costs
Expenses are the other part of the equation, as they reduce your effective take-home pay. While it can be hard to identify all of your work-related expenses, you can bet that it’s a lot more than gas money and parking. For example, wear-and-tear on your car is a very real expense that many people don’t factor into the equation.
Like many other people working in corporate America, I also had work clothes that I had to buy and keep looking nice every day. Even if I brought my lunch from home, I was limited to certain items based on the time and tools I had available to eat my lunch each day.
Now that I am blogging full-time, I’ve realized that I’m avoiding a lot of the expenses that I used to incur on a regular basis.
You can be as conservative or as liberal as you want with this equation, but the book has many more ideas…
- After a hard day, do you ever go out to dinner/dancing/the mall as a reward?
- Do you own a more expensive car/house/clothes/etc. than you otherwise would, in order to help sales or your career?
- Are there expenses that you are paying others to do that, if you had more time, you could do yourself? (e.g., gardening, repairs, cooking, cleaning, etc.)
- Are there foods that you buy because you’re too tired to cook dinner? Weight loss programs you enroll in because you’ve been too busy at work to lead a healthier life?
- Do you have escape entertainment or vacations you take part in that you wouldn’t if you didn’t have a stressful job?
- Are there childcare expenses that could be avoided without your job?
- Are there career-related books, seminars, videos, etc. you use and pay for out of your own pocket?
I think there should be a balance when adding up these costs. Don’t get carried away blaming everything on your job. Regardless, it’s always a good idea to re-evaluate each expense.
Why should you care?
Retirement
Calculating your real hourly wage is an extremely valuable exercise for people nearing retirement. It can be very eye-opening to see how many expenses could be avoided by simply NOT having a job. My hunch is that a lot of people would realize that they can survive on a much lower income if they looked closely.
Stay-at-home-spouse
Many parents want to stay home with their kids, and this exercise might make that decision easier. Is an effective wage of $3/hour worth having a job you don’t like and sending kids to daycare rather than being at home with them?
Career/employer change
I used to work with a woman who drove something like 60 miles to work each day. She didn’t really like her job, and ultimately realized that she could take a $6/ouhr paycut doing something she enjoyed and still come out ahead.
A lot of jobs, especially if you stay in the same industry, have similar expenses. After calculating your real hourly wage, however, you might just be willing to take a chance on that dream job you’ve always wanted.
What’s your real wage?
Have you ever run the numbers? If so, were you surprised by the outcome? Disappointed? Have you made any lifestyle changes as a result of what you learned?
Published on August 3rd, 2009 - 13 Comments
Filed under: Working
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August 3rd, 2009 at 9:17 am
I had never thought of it that way! Factoring in the lunch breaks, the time to destress, the commute-the list goes on. I wonder to what degree you could add pesky or disagreeable coworkers as a cost or a “hovering” boss that threatens your sanity daily…
August 3rd, 2009 at 11:31 am
Thanks for the post. It is also valuable to know your real hourly wage so you can know what time consuming activities actually save you money. If you can spend 10 minutes doing something and save $5 you know that activity is saving an hour wage of $30. Knowing your real hourly wage help you determine if it is worth it.
August 3rd, 2009 at 12:38 pm
This is one place where YMOYL shows it’s age, I think – I did this calculation when I looked at moving from full time to part time work again, and my health insurance costs are a HUGE extra “wage” that I never saw as a full-time employee (well, I saw about 1/3 of it that I paid. But it’s still a big chunk of extra “pay” – now that I’m on my partner’s insurance, he has to pay income tax on the imputed benefit of insuring me, and it’s quite a bit of money.)
August 3rd, 2009 at 12:53 pm
I once left a job for another that only paid about $1,000 a year more. What I gained from taking the job included a shorter commute (about an hour a day round-trip), more freedom, shorter hours, and much less stress. I calculated the “increase” in pay to be about $10,000. Not too shabby.
August 3rd, 2009 at 12:53 pm
This concept is very dear to my heart.
It is empowering if one can truly grasp the power of this calculation… if nothing else, the exercise thereof will always be personally eye opening.
My wife and I have goals… and suffice to say that the challenging truths delivered in this post are an essential ingredient to reaching those goals!
Thanks Bob, great insight as usual.
August 3rd, 2009 at 1:19 pm
In junior college I worked at a retail store in the mall and drove 45 mins each direction to work 4 hour shifts. The company also required each employee to purchase company stock. After all expenses my minimum wage earnings dropped to around $3 an hour. After all the clothing I purchased with my company discount, the store actually made money off of me and came out ahead!
August 3rd, 2009 at 2:01 pm
Ahhh, to blog from home as a full time job. That would be such a great thing to do!
This question highly pertains to real estate and location. I’m willing to pay a premium to live i nthe city center, than in the burbs due to the commute, frustration, and expense. For others, they don’t mind. Each his own.
August 3rd, 2009 at 4:00 pm
Rosa: Excellent point. As important as it is to include all those extra costs, you also need to include the value of an extra perks.
August 3rd, 2009 at 4:57 pm
I highly recommend “Your Money or Your Life.” The exercise discussed by Bob is invaluable, as are a few other exercises required by the book. Worth the read.
August 3rd, 2009 at 5:33 pm
Bob–this is brilliant on so many fronts. It can also help determine opportunity cost. If you think you make $20/hr you might not be interested in a part time job paying 10. But if you calculate in all of the reductions to your regular pay, and come up with a number closer to $13/hr, $10/hr no longer seems beneath your dignity!
Same thing with work around the house. You might be tempted to pay a neighborhood kid $10/hr to cut your lawn until you find out that your real rate of $13/hr means you really should be doing it yourself!
Just something to think about…
August 3rd, 2009 at 6:49 pm
…good topic & discussion.
It’s especially useful for families to fully calculate whether or not the popular “2-Income” approach {mom & dad both working}… really improves the family situation overall. Lots of families seem to automatically & falsely conclude that having Mom work– ‘always’ significantly increases family net income and well being.
Computing “Real Hourly Wage” requires careful review of nominal gross wages versus take-home pay.
FICA taxes are VERY deceiving. Under the ‘Federal Insurance Contributions Act’ (FICA), 12.4 percent of your earned income {up to $106,800 annually} must be paid into Social Security, and another 2.9 percent must be paid into Medicare {no wage limit}. These are highly regressive taxes that kick in on the very first dollar anybody earns.
A worker “seems” to pay ‘only half’ the FICA bill (6.2% Social Security + 1.45% Medicare)… with the employer “contributing” the other half. But in reality the worker pays the full FICA percentage of 15.3% (= 12.4% + 2.9%) automatically withheld from his gross wages.
So if Mom goes to work to help make ends meet — she instantly pays 15.3% FICA tax on every dollar earned.
Then she pays Federal Income Tax, probably State Income Tax, and Local Income Tax in some areas. If she wants to actually spend anything left… she’s hit with at least a 6% sales tax, and much higher taxes on water/telephone/electricity. Should she heroically save any remaining wages in a bank account — the government taxes that interest as ordinary income.
Factor in a family second-car for a working spouse… and the cost/benefit analysis looks grim for average families, unless Mom earns very good wages.
___
August 4th, 2009 at 10:26 am
Well, as a working mom who was a stay at home mom, people talk about this as if it’s an either-or decision, but for most families it’s not. My own mom worked for six years, was a SAHM for 12, and then worked another 20 years in her field before retiring. I worked in one field for 6 years, was a SAHM for 2, and have been back at work 2 years in a completely different field.
You have to think about your lifetime financial security, not just your month-by-month snapshot. Then the financial impact depends on how long you’re planning to be at home, and on your field – an accredited teacher can probably jump right back in after a decade; an IT professional is going to be hopelessly behind in just a few years. It depends on your work history, age, education, what you already have in retirement savings.
And of course you have to look at the stability of your one job, not just salary – my first career was in sales, which was wildly variable over time. My partner, on the other hand, is an engineer who has had the same job since he was an undergrad. The future value of his salary goes up just because it is so dependable – most of my former coworkers have been laid off and their new jobs don’t pay as much because advertising sales are way down overall.
August 4th, 2009 at 1:12 pm
Great comments everyone! I remember thinking about this at an earlier point in my life, but never to the degree that YMOYL takes it. I do recommend the book for people looking for more detail on this principle and other eye-opening ways to change your perspective on your finances…