When I started doing contract work on the side, I was shocked by how much more I made from that side hustle than I did at my day job.
My first gig was only 145 hours, but it brought in almost three times more than my regular monthly salary! And yes, not only does this say something good about the gig, it also says something sad about my salary back then.
Had you asked me then what my hourly rate of pay was at my job, I’d quickly calculate it for you since I’ve always been great with numbers.
Only one problem… my answer would have been dead wrong. Here’s why.
Myth: Your Hourly Rate Is Your Income Divided by Your Work Hours
Albert Einstein reportedly said that one should simplify every problem as far as possible, but no further!
Calculating your hourly rate by dividing your annual salary by your annual hours at work is a great example of simplifying too far, to the point that your answer is simply wrong.
Using such an over-simplified calculation, you miss the time you spend getting ready for work; getting to work; getting back home from work; unwinding from work; and responding to work-related calls, emails, and text messages outside of work hours.
You also fail to account for expenses you only have because of your work (e.g., office-wear, dry cleaning, commuting costs, etc.).
Finally, you don’t account for the fact that the government takes a bite out of your earnings.
Getting the Calculation Right
To account for all the things your mythological earning power misses, let’s take a hypothetical worker, call her Jane, who makes $60,000/year and gets 15 paid days off per year.
Jane is married to Jack, who makes the same income as Jane.
The couple lives in Maryland, and has two young kids who go to before- and after-school programs during the school year and to day-camp in the summer, so Jane and Jack can keep working. They both commute the average time and distance to their respective jobs.
If Jane followed the above myth, she’d think her hourly rate is $60,000 divided by 1960 annual hours worked (40 hours a week, 49 weeks a year, with the remaining 3 weeks off).
That would give her a figure of $30.61/hour.
Not too shabby. That's more than quadruple the federal minimum wage, and nearly triple the higher 2020 Maryland state minimum wage of $11/hour.
The only problem is that like my calculation back in the day, Jane’s answer would be dead wrong.
Here’s a more accurate accounting.
First, let’s go from gross income to actual net income:
Now that we know that Jane makes only $38,500 net of work-related costs and taxes, let’s see how much time she spends earning this net income, weekly and then per year.
Dividing Jane’s $38,500 net income by the 2940 annual hours she spends to bring in that money, her real hourly rate is just $13.10!
Wow! Jane makes less than 43% as much per hour as she thought!
What's worse, if Jane stayed home rather than worked, the couple's childcare costs would drop by much more than half, as would their federal taxes (the same could be said for Jack staying at home, but this article is about Jane's real net income).
This means the couple's residual net income from the second parent working is actually less than $11.90 an hour.
Caveats When Calculating How Much Your Job Is Worth to You
The above calculation doesn’t account for the employer’s half of your Social Security and Medicare taxes, or fringe benefits you may be getting.
For example, your employer may contribute toward your health insurance premiums and/or match your contributions to a retirement plan (e.g., 401k or SIMPLE IRA).
To find your own net income, add to your pay the value to you of those fringe benefits.
Next, if your employer offers more (or less) paid time off, your annual hours would be lower (or higher, respectively). Your commute and other work-related hours may also be higher or lower than our hypothetical Jane's.
The Bottom Line
The way most people think of their hourly rate is closer to what employers pay per hour of work. However, that’s not the number you should care about. To learn the real value of your job and income to you, you need to account for all your unreimbursed work-related expenses, taxes, and work-related time spent outside of hours at the office.
What percentage of your nominal hourly rate is purely mythological?
Financial strategy is all about setting financial goals, crafting a plan to reach them, and doing what's needed to start implementing that plan in both your business and personal life whether times are good or bad. Knowing what your job and your time are worth is critical to crafting your plan and optimizing your execution of that plan. If you'd like to learn what financial strategy can help you accomplish, email me and we'll coordinate a free, no-strings-attached phone call to explore that.
This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.