Your REAL Hourly Wage Will Shock You

How much would you pay for an extra free hour in your day? $10? $20? Some days (like today), I’d pay almost $50 for an extra hour in my life – even if I spent it sleeping.

We all know that time is money, especially if you’re working at a job where you’re paid an hourly wage. Show up for an hour, earn $15. But what comes in you paycheck isn’t what you’re really earning for the time you put into your work.

Your real hourly wage is so much more than just what you get paid for a unit of your time. Your real hourly wage is the relationship between what you earn and the effort, time and additional costs related to your job – the stuff that’s not directly tracked on your pay stub.

I’m going to walk you through how to calculate your real hourly wage. It’s an exercise to help you quantify how valuable your time really is.

And after you realize where you’re spending your time and your money, you’ll want to completely transform your life.

Your Real Hourly Wage: Trading Time for Cash

The idea of a “real” hourly wage comes from the legendary personal finance book Your Money or Your Life. It was the first personal finance book I ever read (back when I was making minimum wage) and it completely transformed my relationship with money. I can’t recommend it enough.

your real hourly wage

One of the more profound concepts outlined in Your Money or Your Life is the relationship between money and time. Time is a limited resource that we choose to spend. And for most adults, that means we choose to spend our time doing one thing for 40 hours (or more) a week: earning money.

There’s an important and powerful message in there: it means that we’re actually paying for money with our time. And our time is something that we will eventually run out of.

your real hourly wage

You may be thinking: “I earn a decent amount of money, so I’m okay with trading my time for that kind of pay.”

I used to feel the same way. For the security of a steady paycheck, I was okay trading 8 or 9 hours of my life away ever day.

Until I calculated my real hourly wage and I found out how much my time was actually worth.

Take Sam for example…

Say Sam takes home about $50,000 a year and works 40-hours a week. His hourly wage works out to about $25 an hour. Sam also wants to buy a new iPad for $500. With a quick back-of-the-envelope calculation, it’s easy to see exactly how much of his time he’s trading away for that iPad. At $25 an hour, he’ll have to work 20 hours to pay for that iPad ($25 x 20 hours = $500). That’s over two days of work. But it might be worth it to him.

See how there’s a direct trade off between time and money? Well, even this math isn’t entirely accurate.

Sam (and you) aren’t earning as much as you think you are. Your real hourly wage is a lot less than what you take home every day. It’s drastically impacted by two major variables: hidden expenses and time sucks.

Calculating Your Real Hourly Wage: Hidden Expenses and Time Sucks

Think about your job for a moment and all of the things you spend money and time on related to your work. How much time do you spend commuting? How much money does that commute cost? Do you have to buy suits and ties for your workplace, clothes that you wouldn’t wear if you didn’t have to? Do you end up eating lunch out because you don’t have time or energy to cook or brown-bag it?

Here are a few sample expenses (both time and money) that might be directly impacted by your job:

  • Commuting: 5 hours a week and $30 in gas
  • Clothing: $600 a year (that includes suits, ties, shoes… the works)
  • Meals: $50 a week (eating lunch out or grabbing takeout on the way home if it’s been a busy day)
  • Decompression / Vacation: $1,000 a year (any time spent removing stress – like a massage – or taking a trip to “escape” from work)
  • Extra work: 10 extra hours a week (with a salary job, some people may work more than 40 hours a week… and not be compensated)

I’m sure there are others you could add to your list (especially if you have kids and work fulltime), but this helps illustrate a critical point: there are a lot of hidden expenses directly related to your job.

So here’s the magic formula for calculating your real hourly wage

Real Hourly Wage = Annual Earnings – Annual Costs / Time Spent for Work

Back to Sam again: What would be his Real Hourly Wage if he factored in all of the costs and time he spent related to his job? It’s his take-home pay ($50,000) minus the expenses above ($6,600) divided by the total hours he spends for work each year (2800, which includes commuting and extra time at work).

 ($50,000 – $5,540) / 2800 hours= $15.87/hour

That’s a lot less than $25/hour he thought he was making. And it means a $500 iPad equates to about 32 hours of his time. It also means that his job is worth a lot less than he thought it was.

I decided to do the same calculations for myself. What I found was shocking.

My Real Hourly Wage is Around $17/hour

With all of the extra time I spend at work and all of the costs associated with my job, I’m earning almost half of what I thought I was.

Yikes.

That means my happy hour after work where I bought $17 in drinks? That’s an hour of my life I spent. That new suit I bought for $130? That was an entire 8 hour day in the office.

Out of this exercise, I came to two very philosophical conclusions:

  1. For every $17 I save, I’m essentially saving myself from working for hour in the future. That rocks.
  2. I would rather pay $17 to have an hour of my life back, instead of working. That’s challenging.

Deep stuff, right?

While I’ll continue to save with a reenergized purpose, I still need to find a way to better manage my time with the money I earn.

What’s Your Real Hourly Wage?

Try calculating your real hourly wage yourself. I guarantee you’ll never look at an hour of your time the same again. And while you’re at it, read Your Money or Your Life, and let me know how it transforms your perception of money.

So now that you know the true value of your time, where will you spend your life energy?

Interested in refinancing your student loans?

Here are the top 6 lenders of 2017!
LenderRates (APR)Eligible DegreesMore Info
2.79% - 6.74%Undergrad & GraduateVisit Sofi
2.79% - 6.74%Undergrad & GraduateVisit Commonbond
2.67% - 7.26%Undergrad & GraduateVisit Lendkey
2.78% - 8.24%1Undergrad & GraduateVisit Citizens
2.81% - 6.39%Undergrad & GraduateVisit Earnest
2.99% - 6.99%Undergrad & GraduateVisit Laurel Road

3 thoughts on “Your REAL Hourly Wage Will Shock You

  1. Marion

    This is inaccurate. On top of my salary, my American employer subsidizes my medical & life insurance, gives matching funds for my 401k, pays part of my ss, pays unemployment insurance, matches my ESPP, vacation, etc. Vacation expenses are entirely voluntary. You could just easily stay at home and not spend 1K. In fact, many salaried employees in the US cost their employers about 15-20% more than just their salaries.

    Reply
    1. Stephanie Halligan Post author

      Marion, you raise a great point. You are very lucky to receive matching funds for your 401k. And it’s very true that an employer covers those taxes that you would otherwise have to pay as a self-employed person. But I think the spirit of the calculation holds true: I still receive paid vacation but more than make up for it by having to work 80 hours extra in excess each month. The exercise of calculating your real hourly wage does not include adding back in your benefits, but I think it’s a good exercise to raise awareness about what else is consumed by your work.

      Reply
  2. Anon

    Great article. This calculation needs to be done by literally everybody.

    I’ll go further and say that you do do another calculation and subtract your fixed costs and see how much disposable/discretionary income you’re holding on to per hour.

    That’s an even better guide to if/whether you want to spend on an new iPod or gadget, etc.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *