How much do you make? $50K a year? OK… how much do you really make? Yeah, your real wage. The answer may surprise you. When looking at the larger personal finance picture, it’s important to figure out how much you truly make when all benefits, compensation, taxes, expenses, and hours worked are considered.
Calculating your real hourly wage is not always an exact science. You can’t always predict promotions, random out of pocket expenses, or an office move. But you can get pretty darn close. Here’s how to do it. For sake of standardizing, let’s look at everything on an annual level.
What is your Real Hourly Wage?
I recently discussed with a friend who was looking for a new job what salary she was asking for in her interviews. She was asking for $70K. Her previous salary was $55K, on the surface, a $70k offer would seem like a respectable salary bump. However, when adding in stock compensation, 401K match, and bonuses in her previous job, it actually turns out she was making over $90K in compensation to my (and I think definitely her) surprise. Suddenly, a $70K salary offer didn’t seem so appealing.
This may seem like an extreme example, but I’m sure many of us have seen cases of friends driving 20 miles and spending an hour in commute to make $10/hour when they could have made $9 with much better benefits and virtually no commute. Calculating your real hourly wage can be a great way to figure out which job to take when there are no other qualitative factors at play.
1. Add up all Compensation
Compensation is everything that you get that you can put a monetary value on. It includes:
- Your salary. If you get paid by the hour, multiply your hourly wage by the # of hours you anticipate you will work in a year.
- 401K match
- Stock compensation
- The market value of your insurance benefits
- Vacation/holiday time
- Any other subsidized benefit you receive that has a value
2. Subtract all Taxes
You won’t actually see this cash, so it’s not ‘real’ money to you. Subtract Medicare, Social Security, state, federal, and local taxes.
3. Subtract Out of Pocket Work Related Expenses
This is anything that you wouldn’t be paying for if you didn’t have the job. This includes:
- Commuting expenses
- Out of pocket clothing expenses
- Cost for food/drink that you wouldn’t be paying for if you didn’t work there. For instance, if you spend an average of $8 a day on food, but would only be spending $5 at home, figure that you’re spending $3 for every day you work in a year.
- Child care expenses
- Insurance co-pays
4. Figure out how Many Hours you actually Spend at Work and Time Related to Work
This is the real game changer here. If you put in 8 hours a day/52 weeks a year you work 2080 hours in a year. But how many of us work exactly 8 hours on average, have zero commute, and spend zero time outside of work enhancing ourselves for our jobs? Nobody. Figure out how much time your job really takes.
5. Run the Math
Real Hourly Wage = (Total annual compensation – Taxes – Work Related Expenses) / Total hours worked in a year
The result might surprise you.
Real Wage Discussion:
- Have you ever calculated your real hourly wage?
- Is it an eye opener for you?
- What is the difference in your nominal hourly wage and your real hourly wage?
My wife’s employer produces their version of these numbers every year when they generate their W2 statements. I would suggest that all HR departments do this. While we can quibble about the values and items included, it definitely starts a good conversation.
I have not tried calculating it, mainly because it wouldnt do anything for me.
It is however an Excellent exercise to do when evaluating a job offer. Everyone (hopefully) considers the cost of living expenses and moving expenses (often underestimated) but there are other little things that add up really fast:
Sure they will be paying you 5000 more a year, but will the new job involve longer commutes? Will you have to dress like a grown up, or will your “i am a programmer” attire do? What about the number of hours you will be putting in? You think you will be working 60 hour weeks instead of 45-50 right now? What about the insurance and the employee contributions to 401k?
Also important are other major changes. Will you need to buy a car because of this? I didnt have a car as a student, but i had to buy one when i moved for the job. If i had been in DC/other place with good public transport, i would not have had to get one right away.
So getting a car? Nice. Here are the insurance premiums. Oh and here’s what you will have to pay for gas. Turns out, you are now spending over 500 bucks a month just on the car. Thats 6000 bucks every year right there. Doesnt look like you’ll be getting that xbox any time soon :P
Never thought to look at it that way to determine how much you actually make plus commute and what not. For your friend the added incentives at the old job were great. Problem is with new job is that the company won’t raise the salary alone even if those benefits aren’t there. It’s looked at as a separate issue.
On the flip side, I have had friends turn down job offers that were between $5,000 and $10,000 less. When you actually wind up looking at the difference in hours worked, work travel, business expenses, etc… they are making A LOT less with the higher paying job.
If you put a value on leisure time, they are EVEN WORSE off!
This is a really smart view on things! Awesome! I have friends who are willing to drive much further to a job that only pays about $3 more, but it gives them a nice “even” hourly wage that they are more proud of. Car maintenance can suck after a few years as well.
I’ve approximated my hourly wage this way, although in less agonizing detail. I also try to calculate the value of goods and services to me as number of hours worked using that real hourly wage figure. It’s rather shocking to realize that the cool new laptop in the window is worth more than 100 hours of worktime! It’s a useful method for squaring up decisions like ‘can I spend time making this myself’ versus buying something in terms of e.g. haloween costumes.
I used to always live right near my work? Might as well move close and experince a new city / area if you have to cut down and travel and enjoy your free time. Maximise the $£ that your earn by not having to spend to get in to work, also meen can haev time for breakfast and over sleaping can still scrape in :)
Great way to look at earnings :
Jay ‘Little House’
I’m in line with Dawg – looking at my total deposits into my bank account with each paycheck and dividing by the hours worked. This gives me my $/hr spending cash. I can then set up my monthly budget by hours required to work to pay for expenses let alone disposable cash purchases.
Looking at budgets and purchases this way has really become an eye opener. I now ask myself not how much something is but how many hours do I need to work to pay for it. Keeps me out of debt! No CC balances for me.
I have worked over 1700 hours of over time this year so far. trying to quit the job. Told could not have a nother day off till after the first of the year. still have 28 hours of vacation time from last year, 120 for thiis year. time start the date you were hired. any thought. I think i am under apeaced. i think i am under paid. do not use there 401; they only match 5%.