For many people they’ve never heard of such a thing as “calculating your real hourly wage.” You get hired at a set dollar amount per hour and that’s what you get paid until you get a raise or a different job, right? Well, not exactly. I think we can all agree that we trade the majority of our time for money. Money allows us to do the things we enjoy and buy the things we need. In essence, time is money. We only get 24 hours in a day and for most of us we spend at least 8 of those hours working. But that’s not all we spend on work. Let’s break it down.
What We Think We Get Paid
The average American salary is about $50,000 per year so we’ll use this for our example. And we’ll reference our made up friend Adam. Adam is a personal trainer at his local gym.
Adam works 8 hours per day, 40 hours per week. His $50,000 averages to just about $24 per hour. We’ll say that he brings home $960 per week (forget about tax for this example, the calculations with tax will be the same). Adam wants to purchase an iPad to track all his clients workouts and progress. The iPad that he wants costs $500, so this would cost him about 21 hours of his time ( 21 x $24 (per hour) = $504).
It’s not quite this simple though. The argument is that we actually earn much less per hour and that it would actually cost him much more time to purchase his iPad.
Factors We Don’t Usually Consider
There’s much more to our jobs than just the 8 hours we get paid for every day. Think about what time you wake up in the morning to get ready from work, what time you actually get home from work, your commute and how much gas costs, the clothes you may need to buy for work, the work you are required to do outside of your 8 hours, food you may buy while at work, etc.
- Work outside of work: Adam spends roughly 10 hours outside of work each week preparing workout plans for his clients.
- Actual time spent for work per day: Adam’s work hours are 7am-3:30pm but, Adam wakes up to get ready for work at 6am and doesn’t get home until 4pm. So that’s a total of 10 hours per day. Totaling 50 hours per week.
- Adam is paying roughly $2.30 per gallon of gas currently and he averages about 20 miles per gallon in his car. He is paying about $0.115 per mile he drives and the gym where he works is about 10 miles from his home. So 20 miles to and from work each day totaling $2.30 per day, or $23 per week. (Assume his gas tank holds 16 gallons, after 3 weeks he’ll need to spend even more time refilling his car with gas, we aren’t going to include this in our example but it shows just how many factors there are to consider).
We’ll say these are Adams only expenses for work (though we know there are many other expenses we could include). They total to 60 hours per week and $23 for per week. 40 hours working, 10 hours preparing workout plans for the week, 2 extra hours per day getting/preparing to work and returning from work and $23 per week in gas money.
Calculating Adam’s Actual Hourly Wage
Remember the original thought was that Adam makes $24 per hour and that it would cost him 21 hours of his time to earn enough money to purchase an iPad that he wants for $500. We also stated that Adam brings home $960 per week.
The formula we’ll be using to calculate Adam’s actual hourly wage is very simply. Actual hourly wage = Earnings – Costs / Hours Spent On Work Related Tasks.
Adam’s earnings: $960
Adam’s costs: $23.
Adam’s hours spent on work related tasks: 60 hours.
Adam’s Actual Hourly Wage: $960 – $23 = $937 / 60 hours = $15.62 per hour.
How many hours it will actually cost Adam to pay for his iPad, $500 / $15.62 = 32 hours.
Before calculating Adam’s actual hourly wage it would seem as if it would’ve only cost him 21 hours of his time to pay for his new iPad. After calculating his actual hourly wage we now know that it would cost him about 52% more time, 32 hours, to be able to purchase a new iPad. It also looked like Adam was earning a wage equivalent to $24 per hour, which also turned out to be false. Adam was actually make 35% less per hour than he thought he was.
This example was very broad and could have included many more factors. But the calculations and the concept is the same. When I first ran this calculation for myself (much more specifically) it was extremely eye-opening. It really put into perspective how much I was actually earning. This has had a lasting impression on me and it definitely makes me consider whether purchasing things are really worth it sometimes.
I think this calculation can also be useful when comparing job offers or considering a job switch. Factoring in all the different variables can help you decide which job will pay you better for your time. It’s important to understand just how you’re being compensated so you can better value your time.
Do you take these factors into consideration when you think about your hourly wage?
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