If you are like many, you see your salary of $50,000 per year and never think twice about it. But you should. You need to figure out what your real hourly wage is and then answer two important questions. I’ll get to these questions later on, but first we have to talk about calculating your real hourly wage.
Your Real Hourly Wage
Assuming the $50,000 annual salary and a 40 hour work week, many think that their hourly wage is roughly $24 per hour. While this is technically true, it isn’t your real hourly wage. To figure out your real hourly wage, you have to take into account all of the expense related to your job.
For example, you have commuting costs to and from work, which includes gas. You also have an expense for lunches and don’t forget about clothing. These are just some of the expenses related to your job. I encourage you to sit down and think of everything related to your job and note how much they cost.
Now that you have this information, you can start to put together the formula for calculating your real hourly wage. Take you annual earnings, in this case, $50,000 and subtract out the costs you have associated with your job. For this we will assume $7,500. This gets us to $42,500.
The next step is to divide this number by the hours we work. But, we can’t just assume a 40 hour work week. We have to take into account commuting time and extra time we spend working that we aren’t paid for (assuming we are salaried employees). So, a 40 hour work week comes to 2,080 per year. When we add in a 30 minute commute both ways and 5 extra hours of work each week, we have a total amount of hours of 2,600.
Now, we take our income $42,500 and divide our hours, 2,600 to come to $16.35. This is our real hourly wage, not the $24 from above.
2 Key Questions about Your Earnings
Now we get to the reason why you have to know your real hourly wage.
- Is what you want to buy worth it?
- What is your time worth?
Let’s look at the first one. If you want to buy a new pair of shoes that cost you $200, you will have to work about 12 hours or a day and a half to pay for them. Is that worth it to you? What about a $40,000 car? That would be almost a year’s worth of work to pay for it.
By looking at your spending as a result of the time you have to spend working, you might come to the conclusion that some things just aren’t worth it. After all, is working a whole day really worth a new pair of shoes? Some might say yes, but others will balk at the idea of spending that money.
But the bigger question is the second one, what is your time worth. Put differently, for every $16.35 you save, you are in effect freeing yourself from working by one hour. After all, you work to earn money. If you save your money, you can at some point stop working and just live off of your savings.
Instead of looking at needing to save $1 million for retirement, focus on looking at it as I suggest above. If you can save $100 each month, you are saving yourself from working 6 hours or close to one day every month. `That’s exciting to me!
While this calculation doesn’t take into account everything precisely, it is a good estimate to understand how much you are really earning at your job. When you do this calculation, you see just how much it really costs you to buy those new shoes, that new car or the new smartphone.
In addition, it gives you a different way of looking at how to save for retirement, which in my eyes is a more powerful view that motivates me to save more.