We don’t earn as much as we think we do. You may be paid $15 an hour, but your real hourly wage is less than that. Possibly much less. Let’s say we have a friend named Joe and that he’s a plumber making about $48,000 a year for a 40-hour workweek. His nominal wage is approximately $24 per hour. Ah, but it’s not that simple. Joe's real hourly wage isn’t $24 — it’s something lower, when you account for the hidden expenses associated with the job. Not only is knowing your real hourly wage useful in terms of budgeting both your time and money, but it's also a great tool for comparing prospective jobs. Even two jobs that offer the same salary in different neighborhoods and cities can have big differences in terms of real hourly wage.
Quantify all of the expenses and time associated with your job. Think of all the things you do and the money you spend that you wouldn’t if you did not work. What is the difference? (See Warnings below.) How long does it take to drive to work? How much does the gas cost? Does your job require that you buy a suit or a uniform? Do you have to take vacations to cope with the stress in your career? Let's continue with the plumber example:
Taxes — Federal income taxes will be taking a large share of the income. Most often, this tax is withheld from his paycheck in an amount that should be a close estimate to his anticipated liability. A rough estimate is around 25% of his income of $48,000 a year, or about $5.75 from each hour. Social Security taxes will take an additional 6%, or roughly another $1.40 per hour. If Joe works and lives in a state with a state income tax, this amount will be deducted in addition. There are also payroll income taxes in certain cities that would need to be deducted.
Commuting — Joe's office is 20 miles from his home. Every day, he spends an hour commuting to and from work in his 2000 Ford Focus, which costs about 38 cents per mile to operate. His weekly commute costs 5 hours and $76 (38 cents times 200 miles). If Joe's employer is a large plumbing company, he will likely not have to absorb the substantial cost of getting himself and his tools from customer to customer or to the job site. More employers are asking the employee use his or her personal vehicle for job related duties, to run errands, make deliveries, or make bank deposits. If his employer does not pay a mileage reimbursement or only pays for fuel costs, Joe would need to cover the additional costs incurred of using his personal vehicle such as insurance, maintenance, brakes, accelerated vehicle value depreciation and increased wear and tear on his personal vehicle. These additional costs are often difficult to calculate and often grossly underestimated by the employee. Using his personal vehicle for duties related his job, outside of standard commuting expenses, can substantially impact the amount of money Joe actually is left with as earnings.
Child Care — Joe will not be home with his child, and his partner also works a full time 40 hr. workweek. For Joe to make himself available for the job, he will not be able to effectively monitor his child. His solution is to drop the child off at a day care center. The weekly cost of this supervision for the child varies greatly, but Joe's cost is about $600 a month. This means that he will need to deduct about $3.50 per hour from his $24 per hour in order to be relieved of parental duty for such time as is required for employment. If making this calculation for more than one adult in the same family, remember to deduct this cost from only one worker — generally the one who would otherwise be the primary caregiver — or divide the cost between them.
Clothing — It doesn't take Joe extra time to get dressed in his work clothes each morning, but it does cost him a little extra money. Several times each year, he has to buy new work clothes because the old ones wear out. Let's suppose he spends $300 more per year doing this than he would by buying only casual clothes.
Food — Joe might take a sack lunch if he were on his own, but he works with a partner who prefers fast food. Joe likes McDonald's and Subway, too, so he's happy to go along for the ride. Each day, Joe spends about $5 and one hour for lunch. If Joe and his partner are too tired after work to make dinner, and must go out to eat, the extra expense of driving there and paying for restaurant service must be added in, as well.
Taxes, commuting, child care, clothing, and food together cost him about 10 hours per week (or 500 hours per year) and about $107. We’ll round it down to $100 per week, so that's about $5000 each year.
Subtract your work-related expenses from your annual salary to find your actual earnings. Using our earlier figures, Joe the Plumber’s actual salary would be $43,000 per year ($48,000 base minus $5000 for commuting, clothing, and food).
Divide your actual earnings by the total number of hours you spend each year on work-related tasks (including business trips, office social events, commuting, etc.). Joe leaves the house at 6:30 in the morning, and does not return until 4:30 in the afternoon, which means he's devoting 50 hours per week — or about 2500 hours per year — to his job. Joe is spending about 2500 hours per year to earn $43,000. His real hourly wage is $17.20. Not bad, but still much lower than the $24 per hour he thinks he's earning.
Think about how much time your expenditures are really costing you. Remember that time is money. Based on nominal hourly wage, if Joe the Plumber decides to buy an iPod Nano ($150), he thinks he's exchanging about six hours of his time for it (6 hours worked x $24 per hour = $144 total wages, which is close enough). But based on his real hourly wage, it would take Joe nearly nine hours to earn the same amount. To earn the money for anything he wants to purchase, Joe has to spend 40% more time working than he thinks he does.
Let's say you're spending a lot of money on comic books. After you calculate your real hourly wage and apply the number to your expenses, you'll be able to see how much time each book is costing you. Was it really worth three hours of your life to buy a collection of Aquaman stories you'll probably never read? If the answer was "no", you'll be more motivated to reduce your spending, especially if there are other things you could be doing with your time.
Add in the benefits. Are you getting health insurance? Life insurance? Dental and vision? Discounted gym memberships? Free or subsidized computer or cell phone? How much would you pay for these items on your own? Does your employer match your 401(k) contribution (free money!) or provide a other retirement benefits? You should also estimate the value of any expected bonuses, stock options, accumulated sick or vacation time, and free training.
When comparing prospective jobs, this exercise helps you remember to take taxes and living expenses into account.
An important job-related expense for many people, is the money and time they spend to "unwind" or to reward themselves after a hard day's work. If Joe's plumbing job is so stressful that every night he comes home and spends 2 hours vegging in front of the TV with a beer, then he uses (loses!) an additional 10 hours a week, and whatever he pays for beer. Or if Jill the plumber relaxes on weekends by hitting up the mall because hey, she works hard for her money and deserves some nice clothes, then she also loses time and money. In this sense, it may be perfectly reasonable to take a less stressful, lower paying job that doesn't lead you splurge regularly, if your real hourly wage ends up being higher.
Medical and childcare flexible spending plans are also a cost savings to you, if you plan well; these increase your spending ability and can be considered part of your "income". However, their savings is in reducing your taxable income, so if you already account for that with accurate tax figures, don't double-count it by adding it to your benefits.
Things like changing to a 4-day week, carpooling or taking mass transit so you can work or read while you're commuting, can all add a few extra dollars to that real hourly wage.
You should only subtract the clothing wear/tear DIFFERENCE (versus not having a job), and the same with food. Even if Joe stayed home, he'd still eat lunch. He'd probably make his lunch at home, so the cost subtracted should be (McDonald's cost - homemade lunch cost). Same with the clothing - if he stayed home, he still wears clothes (or so we'd hope!).
Basic needs (food, clothing, and shelter) shouldn't be a factor in calculating job wages (you need them anyway whether you are employed or not). Salary + benefits - travel expense divided by work time plus commuting and lunch break (if different) should be enough to compare two or more prospective employers, since many of the other expenses will be roughly the same.
This calculation assumes that your other expenses will be unaffected by your choice of employment (housing, food, car, and so on). If comparing jobs in more than one metropolitan area, you'll also need to take into account the difference in price for these necessities of life.