You’ve heard the saying, “time is money”. The problem is, the saying is backwards – it should read, “money is time”.
Think about it – I know people all over that have lots of time, without any real direct ability to turn it into money. Every dollar in everybody’s pocket everywhere in the world, however, represents some amount of time. If you get a paycheck, you got paid for your time. If you earn interest on money, you got paid for giving somebody else your money for some amount of time. Even if you find $1000 on the sidewalk, you had to spend the time to stop and pick it up.
That being said, it might be nice to know how to calculate how much time our money has cost us. This post will tell you how to do that with a conventional job/paycheck. There are two numbers we’re going to calculate here – your “net hourly rate” and your “real hourly rate”.
Calculating Your Net Hourly Rate
This is a pretty easy one. Look at a paycheck. Assuming you have your W-2 exemptions done up properly, just take the amount the check is for (the amount you take home) and divide by the number of hours you had to work to make that amount. So if your check is $100, and you worked 10 hours to get that check, you’d get $10.00. This number is your net hourly rate (in other words, the part you actually get to keep). Working another hour, or calling in sick for an hour, will affect your income by approximately this amount. For people making close to minimum wage, this number will be very close to your hourly rate as stated by your employer. For people making more money, or for people with garnishments (child support, judgements, etc.) the two numbers may be quite different.
Calculating Your Net Monthly Rate
Multiply the net hourly rate by the number of hours you work in a week, then multiply that by 4.3. That’s your “net monthly rate”, i.e. the amount of money you bring home in a month.
Calculating Your Real Hourly Rate
Now comes the fun part. How much does it cost you to make this money? I’m not talking about costs for your apartment, cable tv, cell phone or Internet access (unless they’re needed for your job), I’m talking about costs directly attributable to working. Here are a few examples:
- You have a car that gets 20 miles per gallon, and you have a 10 mile drive each way to and from work. It therefore costs you the price of one gallon of gas per day. Multiply that by how many days you drive to work in a month. In our example, let’s say you work 22 days per month, and gas is $3.00 per gallon. It costs you $66.00 just to go to work.
- You can’t wake up very well in the morning, and your job requires you be there at 7 am – so you hit the Starbucks drive-thru every day on the way to work. 22 days per month, $4.00 per day, $88.00 per month.
- Your job requires you to wear dress formal attire, and you wouldn’t otherwise be caught dead in a shirt and tie. You figure that replenishing/updating the work-related portion of your wardrobe costs you $600 per year. $600 divided by 12 months is $50.00 per month.
- Once a week your department goes out to lunch for a meeting, and you’re expected to pick up your own check. You spend about $20.00 on a meal each time you go out. Multiply that by 4.3 (the number of weeks in a month), and you get $86.00.
You get the idea. In the examples above if your take-home pay is $1200, you’re actually only making $910 per month. The rest ($290) is consumed as a cost of having the job. If you can cut out the Starbucks and the weekly meeting, you can save a good chunk of cash – but if you’re convinced they’re necessary, you’re making $910 per month. Take that number (the $910) and divide it by the total amount you bring in ($1200), and you’ll get a decimal number (in this case it’s 0.758). That means that, for every dollar you take home, you only get to keep $0.758. Just over seventy five cents per hour. Now multiply your net hourly rate that you calculated above by that decimal number, and you’ll see how much you really bring home per hour. You can do the same with your net monthly rate to see how much you bring home in a month.
Why This All Matters
Calculating these numbers are useful for a several things. Here are some examples:
You might identify some hidden spending – If you go through the steps above, it might occur to you that you’re really spending a lot for lunch at work, or for coffee in the morning, or for business clothes, or whatever else. You might be able to reduce that spending.
You might realize you’re actually paying to work – Believe it or not, it’s possible for these numbers to be negative. Once it goes negative, that means that you’re actually paying to go to work, not getitng paid. I know some families with children where the husband and wife both work that have done these calculations, and come to the conclusion that they’d actually make more money if one of them just stayed at home with their kids!
You’ll be able to truly compare different jobs – Estimating the numbers above for two different jobs will give you the actual hourly rates you’ll earn at each. That, combined with the other aspects of the job, can help you make a wiser job choice.
You’ll have a good picture – Knowing the actual amount left over (after paying to go to work) at the end of the month will help you get the rest of your budgeting in check. If you only have $910 left over after paying to work, it will stop being surprising that you’re having a hard time paying for a $700/month apartment, food, and other bills.
Of course having a conventional job is just one of many ways of exchanging time for money, but the calculations above can be used on most any of them.
Questions? Thoughts? Sound off in the comments!