One of my favorite personal finance concepts is that of the “real hourly wage.” It was an idea I picked up from Your Money or Your Life and it’s well worth understanding, so let’s walk through it again before we move on.
Your Real Hourly Wage
Most of us can easily calculate our hourly wage. We just sit down, add up how many hours we worked in a given year, and divided our salary by that number. For example, let’s say someone makes $50,000 a year and works 40 hours a week for 50 weeks a year. Forty hours a week times fifty weeks a year makes for 2,000 hours per year, so if we divide $50,000 by that, we get an hourly wage of $25 per hour.
But does that reflect reality?
Most of us have expenses that we have to take care of in order to keep our job. We have to buy nice clothes. We have to maintain a car, including paying for fuel and maintenance and parking and insurance and registration. We eat out a few times a week to socialize with coworkers. We pay taxes. We go out sometimes to vent our frustration with the difficulties of work.
All of those things should theoretically subtract from our total salary for the year. Let’s say our pal goes out for lunch twice a week and spends $10 each time. He also goes out for drinks once a week with the gang at work and drops $20. He also goes to the driving range to “blow off steam” once a week – another $10 spent on balls each week, plus a new $100 golf club each year. He pays a total of 20% of his salary in taxes and he has to invest about $500 in keeping up his work wardrobe each year.
That’s a total of $13,100 in expenses each year just to keep that job, knocking his real salary down to $36,900 per year. (I’m not even including the cost to commute, whether by car or mass transit.)
But what about that extra time devoted to work? He has to commute half an hour each day, and when he gets home from work, he’s usually so spent that he spends half an hour just spaced out watching Sportscenter. He usually watches two hours of television a night, too, just to “unwind from the day” – though he usually doesn’t do it on days when he’s not working. Twice a year, he has to travel, which eats up about 50 additional hours each time spent traveling and going to meetings outside of normal work parameters. He also has to stay a couple hours late each day for a week about once a month to get projects done – let’s figure 10 hours per month. We won’t even count the messages he returns on his cell phone from coworkers.
That adds up to 820 additional hours each year on top of his usual 2,000.
So, now, he should take that $36,900 and divide it by 2,820, giving him a “real” hourly wage of $13.09 per hour. That job looks a lot different now, doesn’t it?
You can do the same calculation. Figure up how much you actually spend on work-related things each year and how many hours you spend on extra work tasks and pure “unwinding” from work and commuting. That will make a huge difference in the way you look at your job.
I once met a person who worked at a $15/hour job who realized it made more financial sense to quit her job, sell her car, and work at the gas station across the street. She would actually have more money in her pocket that way.
Using That Calculation
I often use that calculation in my day-to-day life. I have a pretty good assessment of what my own “real hourly wage” is, so I sometimes use that when trying to decide whether particular things make sense or not.
For example, let’s say I estimate I can make $18 for an hour of focused writing. A kid offers to mow my yard for $15. I’ll assess that it will take about an hour to mow my own yard, so is it worth it to pay the kid $15 to do it for me? If I spent that hour writing, I would make $18, after all, so wouldn’t I be $3 ahead to just pay the kid to mow and spend that hour writing?
I can use that same comparison with frugality. If I can, say, make enough homemade laundry soap in an hour to save me $15 over buying it at the store, how does that compare to writing for an hour?
Where That Calculation Fails
It’s not a bad comparison if you don’t think about it too much, but I mostly find it useful when comparing various tasks I might be doing besides work and ranking them in terms of priority.
Here’s why I don’t use that comparison for everything.
First, I can only productively work for so many hours per day. After a certain number of hours, my writing goes downhill quickly. I can “force” it, but when I do that, I become mentally exhausted and find myself spending my spare time in really unproductive ways (like watching SportsCenter).
Second, when I have some extra “found time,” I don’t always use it in the most efficient way possible. If I have half an hour to burn, for example, I’m much more likely to spend it playing a game with my kids or going on a walk or doing any number of other things. I don’t turn every single spare hour directly into $9.
Because of these factors, using the “hourly rate” comparison fails in a lot of situations. Here are two examples.
It can justify stupid spending. I might argue that ordering a pizza for $15 makes more sense than spending half an hour making homemade pizza out of $8 worth of ingredients. After all, I’m basically spending $7 more to avoid spending half an hour making that pizza, right? If I can make $18 per hour writing, I’m better off ordering a pizza in this theory.
It can justify paying others for things you could do yourself. Paying the neighbor kid $15 to mow the yard means that I won’t get the exercise from doing it myself. It also assumes I could actually spend that hour in perfect productivity – which, honestly, I probably would not. The hourly rate paints a very false picture.
It tries to assign a value to time spent on personally meaningful things. How much is an hour of time spent playing Frisbee on the beach with my kids really worth? I could argue that it’s priceless… but in order to have that priceless moment, I do have to work sometimes. It’s very difficult to use that “real hourly wage” for any useful comparison here.
So How Is It Useful?
Why is such a number useful to begin with?
It’s a great way to compare jobs. Sometimes, the higher paying job results in less money in the accounts for the time spent earning it. A $12 per hour dead end job might just be making less money than working at the gas station across the street for minimum wage, for example.
It’s a useful baseline for what your time is worth. Whenever I figure out a frugal strategy that has a better return than my “real hourly wage,” that frugal strategy becomes a pretty high priority pretty quickly. Other, lesser tactics might get put off for another day.
It helps you to evaluate purchases. This is the big one for me. Whenever I think about buying something, I convert it into the number of hours I spent working in order to afford that item. A $9 book? Half an hour of uninterrupted work. A $45 board game? Two and a half hours of steady, nonstop work. It’s pretty easy to talk myself out of that kind of purchase when I think about the work tasks that I don’t enjoy, like proofreading. It also motivates me to spend less on essentials and to buy items in bulk.
It reveals how awful wasting time is. Whenever I spend an hour watching a television show I didn’t really care about, I’ll remind myself that I just wasted $18 this way. Of course, there are even better ways to use my time, but that $18 is a pretty stiff reminder of what I can lose by simply wasting an hour. I’m all in favor of leisure, of course, but I want to actually be engaged in something rather than passively burning time, and that hourly rate is a reminder of that.
There is no metric that is always useful – and your real hourly wage is certainly no different. There are times when it shines – such as comparing job opportunities – and times where it can actually cause financial mistakes.
I like having a sense of my real hourly wage, but I’ve learned over the years that it’s not a good comparison for everything.