This article is by staff writer Adam Baker. Baker is a founding member of Untemplater.com, a new multi-author blog focusing on personal finance, entrepreneurship, and life design for people in their 20's and 30's.
Few concepts have had as great an impact on my family's financial decision-making as learning how to calculate our real hourly wage. The concept was introduced by (or at least popularized by) the amazing book, Your Money or Your Life. This book has had a dramatic influence over our financial turn-around (just as it did for J.D.).
The authors focus early in the book on ensuring that readers are aware of the true costs associated with their jobs and incomes — including accounting for the time we spend on activities that are often forgotten.
When Courtney and I first sat down to figure out just how many different expenses were associated with our income opportunities, it was an eye-opening experience. It unveiled a new layer of consciousness towards both our work and our spending. In one case we shifted from, “I make $42,000 per year” to “That really only results in $22,000 net after all expenses are considered.”
The hardest part of figuring your real hourly wage is accounting for those sneaky costs (in both time and money) that eat away at your income streams. Your Money or Your Life does a great job of listing sample expenses, from which we adapted a customized list that I still keep updated to compare opportunities.
Here are the adjusted categories we use to figure our own real hourly wages:
- Time – Alright, so this seems like a generic way to kick things off, but stay with me. For each of the other categories on this list we immediately asked ourselves, “What's the extra time associated with this?” While this isn't a monetary cost itself, putting Time at the top of our list was a reminder to remember to always take this into consideration.
- Taxes – Taxes come next on our list because they're easy to remember. It's common for people to think of “take-home pay” or “how much after tax” when thinking about income. If you're an employee in the U.S., this usually means federal, state, and local (in some places) income taxes, as well as social security and medicare. These numbers are easy to find on paystubs.
- Foundation expenses – This was what Courtney and I called anything that wasn't complete tangible (as in the later categories), but that was required for our work. Courtney had her teaching license fees, union dues, and education conferences. I had my share of real-estate certifications, union dues, broker fees, and sales training. We also included childcare expenses, and more recent visa fees in this category.
- Commuting/Transportation – This was the next most tangible category for us to consider. The key is to estimate what percentage of vehicle use is for commuting purposes. You can then apply this to gas, oil, maintenance, insurance, parking, and tolls. Your Money or Your Life also suggests counting traffic tickets, vehicle depreciation, and lease/interest payments. Even if you don't drive, you'll likely have some public or alternative transportation costs in here.
- Tangible work materials – These were usually physical items that we had to buy and maintain. Out of college, I worked in a factory where I had to purchase ear-plugs and safety glasses (although I was given hardhat). Some people have to provide their own tools, office supplies, or teaching materials. This also includes our fancy cell phones that we justify as “for work,” briefcases, laptops, and other gear/gadgets.
- Clothing – We broke this into two sub-categories. First, there are jobs that require uniforms, special shoes, and/or a certain type of specific non-uniform dress (like the Italian restaurant I where I waited tables). On the other hand are the jobs where we buy professional clothes out of a desire to meet a social standard. Think suits and ties, fancy blouses, and trips to the dry cleaners. If you wouldn't regularly wear it on your days off, it should be included.
- Grooming – We used this to include products like make-up, fancy cologne, special haircuts, and jewelry/accessories. Again, it's important to only include that which you don't use or wear regularly outside work.
- Food/Drink – This is self-explanatory, but contains eating out, snacks throughout the day, and even food purchased after work hours if it's because you “had too hard of a day at work” to cook dinner. I noticed a lot of my increase in food costs was from eating out for “business” meetings and every Friday when the whole office would go out together. Work-related coffee habits can wrack up some damage fast, too (trust me I know).
- Stress – As we began the list, we end it with a general category. The authors of Your Money or Your Life spend a lot of time covering the idea that any time/money that is invested as part of a release, escape, or an unwinding from work should be counted against your income. Some people release through video games or television, while others end up splurging on larger items like spontaneous vacations or larger toys to get away from work. The book even suggests counting increased sick time as a result of stress-related illness!
Look, I know this is a lot to think about. But this exercise isn't meant to discourage. Just the opposite! Remember, there are usually other benefits to your income, as well. This post only features one side of the coin.
However, figuring your real hourly wage is an awesome tool when trying to compare two income opportunities that aren't similar to begin with. It may help encourage you to start a part-time business or may simply remind you of just how beneficial your current employment really is.
If you haven't run your own numbers, I'd strongly recommend it. It worked wonders for us!
What sneaky expenses have you caught eating away at your income?