Your Money or Your Life, Computing Your Real Hourly Wage

A week ago I noted that I am reading through the book Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence: Revised and Updated for the 21st Century. I have read many posts from other bloggers saying this was the one personal finance book that changed their lives the most. So I thought I should read it, list the nine steps the book recommends, and give you my thoughts.

Last time we discussed calculating your lifetime savings percentage, a concept I wasn't really that impressed by. But I'm reserving judgment because I think they are leading us down a careful path. And today's step is another move along that journey.

Step #2 actually has two parts as follows:

• Establish the actual costs in time and money required to maintain your Job (yes, they capitalize "job"), and compute your real hourly wage.


• Keep track of every cent that comes into and goes out of your life.

Your Real Hourly Wage

One of the main thoughts preceding step #2 is the following:

Money is something we choose to trade our life energy for.

In other words, we all only have so much time (life) here on earth. Someone (or more than one) in each family trades part of his/her time in exchange for money, so the family can survive. They are literally giving up their lives to get money.

So, how much money are you getting in exchange for your life? It's a lot less than you think -- which is the exact point of computing your real hourly wage.

Why is it a lot less than you think? Because there are a myriad of costs associated with you working -- commuting costs, clothing costs, meals, and on and on. The book even assigns costs to things like "daily decompression" and "escape entertainment" as expenses associated with working. In addition, there is time associated with each of these, making the time devoted to work much more than most people assume. The net impact is that you're actually making less than you think while spending more time to do it.

Once all costs are deducted from the amount you're paid and hours added in for other job-related tasks, you only bring home a fraction of your paycheck while working much more than you think. When you divide the net amount earned by the total hours work requires, it's a rather sobering experience. You see your net proceeds for giving up an hour of your life, and the result isn't encouraging. This is exactly what the book wants you to realize -- that you're getting far less than you think in exchange for your life energy.

I realize that this process might be a bit confusing when described in words, so here's a chart from the book that may add some clarity:

Basic Job (before adjustments): 40 hours/week; $680 dollars/week; $17 dollars/hour

Adjustments

• Commuting: 7 1/2 hours/week; $100 dollars/week
• Costuming: 1 1/2 hours/week; $23 dollars/week
• Meals: 5 hours/week; $40 dollars/week
• Decompression: 5 hours/week; $30 dollars/week
• Escape entertainment: 5 hours/week; $40 dollars/week
• Vacation: 5 hours/week; $30 dollars/week
• Job-related illness: 1 hours/week; $22 dollars/week

Time and money spent on maintaining a Job (total adjustments): 30 hours/week; $285 dollars/week

Job with adjustments (actual total): 70 hours/week; $420 dollars/week; $6 dollars/hour

So the point is that while you think you're earning $17 per hour, your job is actually delivering $6 per hour. It's a big wake-up call, huh?

I have two responses to this exercise:

• Yes, there are extra costs and time associated with working that most of us don't take into account when we think about how much money (and for what time) our jobs deliver. This is why it's often easier than most people think to go from two incomes to one.


• The information above might be a bit over-board. After all, you're going to have to eat even if you don't have a job, right? So is that time really gained if you don't have a job? I actually spend less time eating when I'm at work (I usually eat at my desk) than I do when I'm home with my family.

This said, they have a good point. There are costs associated with working -- in both time and money. And it might be (I'm not sold on it yet) worth the effort to figure out just how much you really make per hour.

Track Every Penny

I'm in 100% agreement with their second point -- that we should keep track of every cent that comes into and goes out of our lives. In fact, this is the second step in my 30 steps to great finances.

Here's how the book describes the purpose of this part:

It's the best way to become conscious of how money actually comes and goes in your life as opposed to how you think it comes and goes.

I agree. I've had people do this exercise time and time again (as part of counseling I'm done) and they are ALWAYS surprised in one way or another. They discover places they never knew where money was leaking out of their lives -- and it all added up to a pretty good sum over time. Without tracking spending by the penny they would have never known this.

The book doesn't give a time period for tracking your money by the cent and I'm thinking they mean for it to become a life-long habit. This is a bit over-board for me to recommend as a widespread practice (even though our family tracks pretty close to every penny -- through Quicken -- that we spend). I suggest people track every cent they spend for 30 days as a step toward developing an accurate cash flow plan. From there they may want to repeat a 30-day tracking once or twice a year, though a regular tracking system (like using Quicken or Mint) will handle much of what you'll find by writing down every penny spent in a notebook.

So, that's my take on the book's step #2. What's your take on it?

Update: Click here to read part 3 of this series.

Comments

[Petra]

I loved the "Your Real Hourly Wage" exercise, and since you should adjust it to your own situation, mine is very different from the one you describe. My "real hourly wage" went from $23 to $18, to include costs for traveling, time spent traveling and increased cost for meals during work (I should prepare something at home and bring that with me, but often I don't and then buying prepared meals is more expensive). I have no extra costs for clothing or decompression hours (I decompress while traveling).

It really does depend on your situation and the book helps you find all, even hidden, costs...

[Roy]

I think the exercise is missing the point that you are also getting more than a hourly wage from your job like health insurance, in some cases life, disability, unemployment insurance, social security, and company match retirement accounts. Then there are perks like cell phone, car or travel reimbursement, social and career networking. It would be pretty difficult to calculate your real hourly wage if you take both benifits and expenses not just expenses into consideration.

[Worli]

Wow, $12.80 an hour! Now you know what the low to average cost of an agent is in the USA. After understanding what your true hourly operating expense in the US, it will make outsourcing look like a really dreamy proposal.

[Dirk T. Sanchez]

I subtracted the taxes, insurance, social security payments, union dues from my base pay, and I went from $25.52 an hour to $15.30 an hour. When I add in the expenses in your example, I make about $1.00 an hour.

[Catherine]

I first read YMOYL when it came out over 20 years ago. At that time, the true hourly wage was just an interesting exercise.

Three years ago, after being laid off and out of work for 13 months, I joined the ranks of those who do consulting. How to arrive at my rate? Now, I'm aware of formulas and averages for this sort of thing, but those don't represent my experience and my expenses. To negotiate an adequate fee for either consulting on W2 or on a 1099, you really need to value your time appropriately and consider as accurately as possible what it costs you to do your job.

It benefited me do have gone thru the 'real hourly wage' exercise. When you are evaluating a career choice, a career change, furthering your education, taking a promotion or a second job or retirement, this information will only help. The alternative is to remain ignorant, which apparently works for a whole lot of people.

[Old Limey]

Looking back to my working days there were several benefits that, after a 32 year career, added up to a lot of additional money.

1) The pension that I have received for the last 20 years was non contributory.
2) We are both still eligible to be in my former employer's group health plan.
3) The 401K plan with maximum company match, now converted to an IRA is well into 7 figures.
4) The company paid all expenses towards my MS engineering degree.
5) Soon after I hired in the company sent me off to their own training department to learn how to program. Not only did it advance my career but the skills carried over into retirement when I was able to put those skills to use marketing my own software to 1650 paying customers as well as enhancing my investment skills.
6) The annual 5 weeks vacation I received enabled me to satisfy my world travel goals.
7) I retired when SIRP, "Salaried Incentive Retirement Plan" was announced. That golden handshake was $44,600.

[mike crosby]

I read the book years ago. I'm so glad you pointed out the expenses related to working. I had forgotten.

I wonder if that might be a reason why people who retire/quit career job early, actually increase their portfolio as time goes by.

[Apex]

I find this entire exercise to be rather rediculous. It is true that there can be job related expenses but most of them do not actually go away if you don't have a job. Daycare is an example of one that would be a pure job related expense because it can entirely go away if you quit. I don't see a single thing listed as an example here that is.

>>> Commuting: 7 1/2 hours/week; $100 dollars/week

Yes, commuting can be a job related expense but if you don't work will you just sit at home all day. My wife does not work and puts on double the miles per year that I do commuting to my job (I have a 30 minute commute, one way, and I have investment properties I need to visit from time to time), and she puts on about 10-20% more miles per year than she did when she was working by the way.

>>> Costuming: 1 1/2 hours/week; $23 dollars/week

Yes you need to buy clothes for work but will you sit home naked if you don't work? Your work clothes might cost more but clothes wear out with use and you have to be wearing something so most of this cost is going to happen either way.

>>> Meals: 5 hours/week; $40 dollars/week

This is so dumb I can't even say anything else about it.

>>> Decompression: 5 hours/week; $30 dollars/week

Really? What are we doing to decompress that costs money that we wouldn't do otherwise?

>>> Escape entertainment: 5 hours/week; $40 dollars/week

Now this is completely unfair. If you are home all day every day you are going to spend far more on entertainment than you will trying to escape in your few hours away from the job. This is not a cost, it's a savings. Retired people don't need entertainment right?

>>> Vacation: 5 hours/week; $30 dollars/week

Retired people don't take vacations right? This is not job related, it's a lame point.

>>> Job-related illness: 1 hours/week; $22 dollars/week

Some jobs might cause higher exposure to illness than others, but I doubt most do. You get sick whether at work or not.

If this exercise was accurate many people would find out they make nothing. So quitting their job is the obvious response to that right?

There truly are job related expenses but when someone makes a point this poorly thought out it hurts their credibility.

[Jonathan]

Apex,

I disagree. I read the book a few years ago and there is no denying that there are many costs, direct and hidden, in going to work. They vary from person to person and job to job, obviously, but this section of the book attempt to get the reader to consider all of those costs. Assign your own values to them (down to and including $0) but for a lot of people, many of these costs are real even if they never think about them. And just as an example, you disregard "Meals: 5 hours/week, $40/week" - most people work 40 hours a week, but they are actually away from home one hour more each day for lunch, and many buy a lunch every day because it is the most convenient option. If you were home and could spend $2 and 10 minutes fixing yourself a salad or sandwich, you should definitely consider that 50 minutes and $8 a day as an additional cost of your job.

[Apex]

@Jonathan,

Sure, but if you are going to do that at home why can't you bring your sandwich to work. No extra money and no extra time. That's a choice and you don't have to make it. And if you like to go out with your co-workers and have a good meal and spend some leisure time with them then that has value. You can't get that if you are just at home by yourself. So instead you go out with friends at night to a restaurant where you spend 30 dollars to get your camaraderie.

I also don't buy the idea that time spent on activities like eating, getting dressed, commuting, vacationing (this one is patently ridiculous) should be considered as if they were working hours to spread your wage across. Most of that time will be spent on those activities anyway and even if you spend more of it because of work, its not the same drain on you that work is and not every hour of the day can be productive anyway, people need downtime and some of that serves as that.

I don't deny that there are real costs associated with going to work but I think for most people they are at the margins, 5-10%. The idea that my wage is something like 1/2 or 1/3 of what it seems like? I don't find any credibility in that kind of calculation.

We will have to agree to disagree.

[Noah]

I'm in agreement with Apex.

Most of the "work-related expenses" are things I would be spending my money on anyways. The only real additional cost for me is gas and wear/tear on my car. In fact, I save money in a lot of ways while at work because I'm not using home electricity for things like AC, computer, lights. I also have access to free drinks at work, so I never buy soda or coffee for home.

[Catherine]

@Apex --
do you disagree with the exercise in general or the example given in the exerpt?

For my job, I'm out of the house 12 hours each work day. If my employer pays me an adjusted gross income of $100,000 per year for 40 hours per week, it works out to an hourly rate of $48 if you calculate $100,000/2080hours per year. Not too shabby. Uncle Sam takes 28% and I'm really putting in 12 hours per day if I factor the commute, so it's more like $72,000/3160 hours or $23 per hour for 60 hours each week. Not terrible, but if I have to pay a babysitter $10 per hour, I'll net $12 in spendable cash each hour that I dedicate toward earning an income.

The purpose of the exercise is simply knowledge. When I know that my real rate is $12/hour, a new television priced at $200 doesn't cost me roughly 4 hours work, it costs me 16 hours of work. My parking/rail & subway expenses are $600 per month. It takes almost a full week at $12/hour just to earn enough money to get to work. The idea of car payments is an anathema to me.... because I know my real hourly rate, courtesy of YMOYL.

Now, I'm not crying poverty by any stretch. I earn significantly more than the in the details I gave and I have a stay at home spouse, so I'm not often paying a babysitter. But the title of the book is YOUR money or YOUR life. Your salary may be more or less than mine. When you and I go to buy a new IPAD, we might both see the same sticker price and we might both fork over the exact same number of Benjamins, but it doesn't cost us the same effort. Wouldn't you want to know what it really costs you?

[Jonathan]

Catherine,

One thing to consider, though, is that the $600 a month it costs you to get to work is already factored into that $12 an hour. Once you get to that $12 figure, then every hour you spend getting ready, commuting, eating lunch, and working "earns" you $12 an hour after all expenses are factored in. You don't have to re-earn the cost of commuting at the lower rate.

[DR]

I agree with Apex, that there are only a few work related expenses that make a difference (day care, extra fuel costs, additional wardrobe). We will eat, take vacations, spend on entertainment, even if not working, so those costs are marginal at best.
And if you are not working, you make 0/hr anyways.

[Noah]

@Catherine

I like the exercise of figuring out how many man-hours each thing costs, but I also factor in how many hours of enjoyment each purchase will bring me. This is why I hardly ever eat out because the enjoyment is 10 min whereas buying something like an Ipad/Iphone can bring thousands of hours of enjoyment.

Speaking for myself, the examples used above are meaningless because I would be doing those things anyways whether I'm working or not. There are also things that I do at work like using electricity and AC and even using the restroom, that save me the cost of doing it at home. It's like when you go on vacation for 2 weeks and then see a large dip in the electric and grocery bills for that month :)

[Apex]

@Catherine,

I don't object to the exercise but I think when people are writing books they do things like this for effect. It wouldn't really seem like a big deal if your $48/hr dropped to $44/hr. But if it drops to $23 its like holy cow. I make less than half what I thought.

If you have a really long commute that is a bummer but even then I don't think the wage comparison by factoring all those hours in is valid.

For instance, if you have a 4 hour commute and your wage drops to 20 bucks an hour are you better off taking a job stocking shelves at the grocery store for $22/hr just around the corner from your house and then doing that job for 12 hours a day? No Way! Because stocking shelves for 12 hours a day is hard work. Sitting in your car is not. It's just not a valid comparison. Even if you could work doing data entry at an office right around the corner from your house for $22 / hr versus have a long commute, would you sooner do actual work for 12 hours a day versus 8 hours of work and 4 hours of commute? Commute hours do not equal work hours and to just throw in all hours as if they are the same as if you are doing actual work is something I consider to be a false calculation. It is lost time and that is worth considering but it is not the same as work hours.

* Day Care is a pure work expense.
* Pay for parking is a pure work expense.
* Commuting costs over and above what you would commute without working or working closer to home is a pure expense but I think most people over estimate this. If you were not working, odds are you would be commuting somewhere else for leisure half the time and spending money by the way.

[Catherine]

Noah -- exactly. The enjoyment you get out of something determines its real value. That comes later in the book.

What I can't get over is the resistance some seem to have to doing a simple math exercise. It's arguing in favor of ignorance.

[Apex]

@Catherine,

Can't speak for others but I am not arguing for ignorance. However doing an exercise that gives an invalid assessment is not making one more informed. I would argue ignorance is better than being "informed" incorrectly. And I believe this exercise as it is being touted by the book leads to one being informed incorrectly.

[Lance@MoneyLife&More]

There is a lot of questionable calculations in the book from what I can tell but some of the items would actually be avoidable. Those would be the only ones I'd use in my calculation because if I would have to do them if I stayed home then it is a moot point.

[08graduate]

@Apex "would you sooner do actual work for 12 hours a day versus 8 hours of work and 4 hours of commute?"

Yes. Without a doubt.

http://scienceblogs.com/cortex/2010/03/30/commuting/

[Noah]

"Would you sooner do actual work for 12 hours a day versus 8 hours of work and 4 hours of commute?"

12 hours for sure if it's hourly :)

I work 9 hours a day only because of the OT. If I was only salary I would be there not a minute past 8 hours.

[Mark]

@Catherine, Apex, Noah, et. al.
What an excellent discussion! I love listenting to smart people discuss relevant topics.
Not knowing what the remaining steps bring which may put these first steps into a different perspective, here are a couple observations:
1. The exercise of calculating your real wage is relevant, and of course each person can calculate what to include or not include as a valid work related cost. But the concept seems sound.
2. Just as relevant, there seems to be another side of the ledger that is additional value recieved from working, some financial, some intangible. For instance, company match on 401(k), insurances provided, etc. So it seems the starting point for the financial part of the caluclation should include your "true" salary that goes beyond just the take home pay.
3. With respect to the intangibles, there are the relationships, achievements, satisfactions, etc that you get from your work. Those don't factor into the financial equation, so they wouldn't "count" toward determining how long you have to work to pay for something, but they do "count" when assessing the bigger picture (maybe that comes later in the book?).
Anyway, that's my intitial, albeit incomplete reaction to the post and the ensuing discussion.

[JayB]

I factored a few of these expenses into my decision to leave a higher paying job for a lower paying job MUCH closer to home. In the end, I go home for lunch between 2 and 3 times a week now saving $20 to $30 a week, my gasoline costs are less than 1/4 of before, my commute was 45 minutes, now its 5. And I am happier because I do not fight traffic daily and I have more time to do the things I want to do. Another plus is 100% insurance coverage versus half which saves me another $100 a month. Oh yeah, I have an office with a window and not an 8x8 cube! I took a pay cut of 5k leaving a government contractor job for private engineering. Best decision I have made thus far in my working career.

Long story short, I factored all of the working expenses in to see if it would be worth it to leave. It really came down to time management and if I would be happier in the end, the 5k is relevant, but if I need to cut back on a few things, thats fine, in the end it wasn't really about money. I am less stressed and happier overall, which is worth way more than 5k a year.

I think the book is pointing out some good things to consider, but at some point quality of life outweighs a few of the working expenses. Some expenses are more valid than others it seems too.

[Apex]

@Noah,

I think you missed the point I was making.

Would you sooner work 8 hours at $30/hr with 4 hours of commute or 12 hours at $20/hr. The money is the same and the time commitment is the same so it should be a toss up right? I would take the 8 hours of actual work. but even if you upped it to $21 or $22/hr so that the 12 hours was slightly more money I would still take the 8 hours. 12 hours of actual labor day in and day out gets to a burn out point.

That's why the whole point was about not counting commute hours as if they are the same as work hours.

[Apex]

@08graduate,

That's a fair point. I don't find that to be true for me, not that I find commuting enjoyable or anything.

It's also the case that the study doesn't compare exchanging commuting for extra hours of labor that you received no extra compensation for as used in these calculations so it's unclear how that would affect people.

I do know that I personally would not exchange commute time for extra unpaid work time.

[Apex]

@JayB,

Sounds like you did a very good assessment and made a great choice!

[Noah]

@Apex

Ah, got it. Obviously the 8 hour at $30/hour is better but there is no way you could get me to have a 4 hour daily commute. I'd either quit or move closer very quickly.

[Apex]

@Noah,

Agreed, I guess that was just an extreme example.

For me the 1 hr daily commute I have is not that bad. I spend some time talking to my father on the phone or I listen to things I am interested in on the radio. I wouldn't mind it being shorter but I certainly don't find it dreadful. And if it was shorter I would not have time to talk to my father and that would probably be a net loss.

Once again it comes down to how people use their time and the choices they make.

[Noah]

@Apex

Being an introvert, I also enjoy the commute. I am able to listen to audio books and podcasts on the road so time does go by quickly. My commute ranges from 20 min to 45 min each way.

[Kelly@All-FinancialNews]

It seems like this tip keeps coming up over and over; to track every penny. It's easy for us to assume and generalize about where we are spending our money, but unless you really write it down, its hard to see where it goes as each day is different. Although I don't like the idea that you are literally giving up "time" in your life for money, that really is what a job is. Unless you have the pleasure of doing what you love while also being able to spend time with friends or family, work really is just that; giving up life to gain money- how depressing!