How to Calculate Your Real Hourly Wage (and Why You Should)

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Like many of you, I was first introduced to the concepts of calculating your real hourly wage and trading your time (or life energy) for money in the book, Your Money or Your Life.

If you haven’t read it, I highly recommend it. You should be able to find a copy at your local library. If you can’t find it, ask your librarian to request a transfer from a library in-network.

One of the main tenets of the book, is that we all have a finite amount of life energy. That life energy is equivalent to our time on this earth or, in other words, the time that we’re alive.

When we go to work to earn an income, we are essentially trading that time for the money we receive from working.

To get the most out of our time, we should strive to make the highest wage, right?

The short answer is yes, but it shouldn’t just be your highest hourly wage. It should be your highest real hourly wage.

How to Calculate Your Hourly Wage

To calculate your hourly wage, it’s pretty simple. If you get paid by the hour, then you already have it.

If you have an annual salary, then you just divide that salary by the expected hours you would work during the year. For example, if you make $100,000 per year and are expected to work 50 hours per week, then your hourly wage would be:

$100,000 / (50 hours per week * 52 weeks) = $38.46 per hour

If you make the majority of your income from commissions, then a good way to determine your hourly wage is to take an average yearly income from the past 2-3 years and treat this number as your salary. Then calculate your hourly wage just like we did for an annual salary using estimated hours per week.

Job Related Expenses

However, this isn’t the whole story. According to the book, you should account for those expenses that are directly related to your job and subtract them from the income you receive.

Take a moment and think about all of the spending directly attributable to your job.

Would you:

buy the same clothes if you didn’t need them for work?

own multiple cars? have to commute?

eat out as much?

still need that week-long vacation?

Write down your job-related expenses and assign a value to them. To get the best results, be completely honest with yourself.

For instance, let’s say you have the following expenses directly related to work:

$500 on clothes

$50 per week in gas

$30 per week in eating out

Next convert them to an annual amount.

$500 + ($50 per week * 52 weeks) + ($30 per week * 52 weeks) = $4,660 per year

How to Calculate Your Net or Real Hourly Wage

To calculate your net or real hourly wage, you simply take your annual salary, subtract your work-related expenses, and divide by the hours you worked for the year (or estimated hours for the year).

(annual salary – work related expenses)/working hours for the year = Net Hourly Wage

For a quick example of how your work-related expenses can affect your hourly wage, let’s take a look at the net hourly wages of John and Jane.

Case Study 1: John

John is a lawyer for a prestigious law firm.

He makes $140,000 per year in annual salary. The culture at his place of business promotes working long hours to get ahead, so he works 60 hours per week on average.

His hourly wage is:

$140,000/(60 hours per week * 52 weeks) = $44.87 per hour

His job-related expenses include the following:

Commuting to work (maintenance/gas) – $200 per week

Work lunches – $100 per week

Professional attire – $5,000 per year

Vacation – $10,000 per year

Landscaping Service and House Cleaning Service – $500 per month

Because John works so many hours, he’s often tired when he gets home and barely has time to see his family. In addition to the normal work-related expenses (commuting, work lunches, work attire), he also pays for a lavish vacation each year (due to the stress, he needs to get away for an extended period of time) and since he doesn’t have time for much else, he pays to have someone clean the house and take care of the lawn and landscaping.

Computing John’s Real Hourly Wage

To compute his real hourly wage, we start with the income. It’s already in salary form, so we can use it as-is.

Next, compute the expenses. You take all of the listed expenses and convert them to an annual expense.

Commuting to work (maintenance/gas) – $200 per week * 52 weeks = $10,400 per year

Work lunches – $100 per week * 52 weeks = $5,200 per year

Professional attire – $5,000 per year

Vacation – $10,000 per year

Landscaping Service and House Cleaning Service – $500 per month * 12 months = $6,000 per year

TOTAL = $10,400 + $5,200 + $5,000 + $10,000 + $6,000 = $36,600 per year

Finally, we subtract the expense from the salary and divide by the hours worked in a year’s time.

Real Hourly Wage = ($140,000 – $36,600)/(60 hours per week * 52 weeks) = $33.14 per hour

Although John’s traditional hourly wage is $44.87 per hour, after all of the work-related expenses, it drops considerably to $33.14 per hour.

Case Study 2: Jane

Jane is a software engineer that works from home. She makes $70,000 per year in annual salary. In addition, she makes $100 per hour freelancing on odd jobs throughout the year using the same skills.

She works on average 40 hours per week as an engineer. She works ~4 hours per week on her freelancing work.

Her hourly wage is:

$70,000 + ($100 per hour * 4 hours per week * 52 weeks)/(44 hours per week * 52 weeks) = $39.69 per hour

Her job-related expenses include the following:

Faster Internet – $100 per month

Upgraded computer – $200 per month (upgrade about every two years)

Computer accessories and software – $300 per month

Home office expenses – $50 per month (some months less, some more)

Vacation – $1,000 per year

Because Jane is able to work from home, she doesn’t have the same expenses related to work attire, commuting, and lunches. Because she’s happy with her setup, she doesn’t feel the need to leave for long periods of time, and when she does take a vacation, she doesn’t feel the need to spend much.

Although the freelance work can be hectic when projects are active, she still finds time to cook, clean, perform yard work, etc.

Computing Jane’s Real Hourly Wage

To compute her real hourly wage, we start with the income. The software engineer income is already in annual salary form. However, the freelancing work needs to be converted to an equivalent annual salary.

$100 per hour * 4 hours per week * 52 weeks = $20,800 per year

Her total income = $70,000 + $20,800 = $90,800 per year

Next, compute the expenses. You take all of the listed expenses and convert them to an annual expense.

Faster Internet – $100 per month = $1,200 per year

Upgraded computer – $200 per month (upgrades about every two years) = $2,400 per year

Computer accessories and software – $300 per month = $3,600 per year

Home office expenses – $50 per month (some months less, some more) = $600 per year

Vacation – $1,000 per year

TOTAL = $1,200 + $2,400 + $3,600 + $600 + $1,000 = $8,800 per year

Finally, we subtract the expense from the salary and divide by the hours worked in a year’s time.

($90,800 – $8,800)/(44 hours per week * 52 weeks) = $39.25 per hour

Because Jane doesn’t have many work-related expenses her real hourly wage is not much lower than her traditional ($39.25 per hour versus $39.69 per hour)

John Versus Jane – Lessons Learned

Even though John makes significantly more than Jane (~$50,000 more per year), Jane makes more in net hourly wage.

John accepted his high paying job without considering what he would be giving up. He works longer hours than Jane which leads to paying someone else to take care of the chores he can’t and taking long and expensive vacations because of the stress. In addition, he spends money on traditional work-related expenses like commuting, work clothes, and work lunches that Jane doesn’t have to worry about.

Jane is perfectly content working at a lower salary, knowing that she makes up the different in not having to spend money on normal work-related expenses. Also, because she only works 40 hours per week, she still has time to do some freelance work and handle things around the house.

Use Your Real Hourly Wage to Evaluate Job Opportunities

Something I’ve done ever since reading Your Money or Your Life, is to evaluate job offers based on my projected real hourly wage.

I think its good practice, even if you end up accepting a lower real hourly wage for other reasons because then, at least, you can compare apples to apples.

To do this, you compute your real hourly wage for each position you’re considering. When calculating income, make sure to include the equivalent cost of benefits between offers as part of income.

Ultimately, you shouldn’t accept a job simply because it has a better real hourly wage on paper. You should look at whether or not you think you would enjoy it, the company culture, the team you’ll be working with, opportunities for advancement, etc. . However, once you get offers from your chosen companies, you should consider comparing your real hourly wage for each position to make sure you’re not overlooking something.

A Different Way of Thinking About Spending

Another practice I started after reading Your Money or Your Life, is to evaluate each large purchase (typically more than $100) in terms of how many hours you would be giving up to purchase that item.

To do this, you first calculate your net or real hourly wage. Then you divide the cost of that purchase by the real hourly wage.

For instance, let’s say your net hourly wage was $25 per hour. You’re looking at purchasing a computer that costs $650.

$650/$25 per hour = 26 hours

Next, ask yourself, is this computer worth 26 hours of my life?

If it is and you truly believe its worth that time, then purchase it. If not, consider buying a less expensive model that will do the same thing (for less hours of your life) or just forgo the purchase altogether.

How to Calculate Your Real Hourly Wage – Conclusion

If you’re interested in calculating your own real hourly wage, you can follow the directions above to calculate it yourself, or you can try out this nifty Life Energy Calculator at the Your Money or Your Life website.

Once you know your real hourly wage, you’ll be able to see how much time you’re giving up for each purchase you make. Hopefully this will discourage you from making some purchases you otherwise wouldn’t have made.

Have you calculated your real hourly wage?

Did it change how you approach spending? How about evaluating job opportunities?

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