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?