What Is Your Real Hourly Rate?

Jake

Jake is the co-founder and co-author of The Wicked Wallet. He has a bachelor's degree in finance and is also a member of the Army Reserves. His goal as a personal finance blogger is to help educate others so that they can live life on their own terms.

July 1, 2019

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Do you know what your real hourly rate is?

This probably seems like an obvious question right? Simply divide your paycheck by the number of hours you worked and boom that’s your hourly rate. I would argue, that the hourly rate you think you are getting paid is not your real rate.

Bear with me for a minute. When you wake up in the morning to get ready for work are you getting paid for that time? How about when you get in your car and commute to and from work, is that factored into your hourly pay? Alright, now that I got you thinking let’s dive deeper and calculate what your real hourly rate is. Spoiler Alert: The results may be shocking.

Understanding Your Rate

As I quickly hit on in the introduction, the hourly rate that you believe you are getting is strictly for the time that you are spending at work. What you are getting paid for is the normal 40-hour work week, but nothing for hours spent leading up to or after work. Anytime that you spend preparing for work or thinking about work is time that you should factor when calculating your real rate. Let’s discuss some of the time factors that aren’t reflected in your hourly rate.

The Morning

Every morning Monday – Friday you have to wake up at a set time to get ready and make it to work on time. Let’s say you give yourself an hour every morning to get dressed, eat, and any other chores you need to do before leaving for work. That’s 5 hours every week that your taking out of your personal time and not being compensated for. You may even spend more than an hour every morning to get ready. The point is this time can add up and should be included when factored into your hourly rate.

The Commute

For the lucky ones out there you may be able to walk or bike to work. However, those with long work commutes know the pain all to well. I can attest to this personally, the commute to my first job out of college was over 2 hours…each way. To put that into perspective that’s 20 hours of driving in a 5 day period, almost an entire day wasted! Yes this is definitely not the norm for commute time, but there are people making these voyages daily.

According to the U.S Census Bureau the average one-way work commute in America is 26.1 minutes. The average American spends around 4.35 hours per week commuting to and from work. Again this is time that is not factored into your paycheck, but should be included to calculate your real rate.

The Wind Down

Who else gets home from a long day at work and is so mentally drained that they don’t want to do anything? You feel like cracking a cold one and taking a load off. Let’s be honest, work can be stressful and challenging and it’s okay to relax when your out. However, if you hadn’t been working would you use this time differently? You probably wouldn’t be that drained, maybe you’d have energy to spend quality time with your kids, or get some exercise, or get to work on that side hustle you’ve wanted to start.

The point is that work is the cause of this daily wind down period. For simplicity, let’s say that you spend 1-hour every day after work to unwind. That’s 5-hours per week off the clock that is directly related to work. This time needs to be factored into your real hourly rate.

The Miscellaneous Costs

These are the costs that most people really don’t think about but do have an impact on there earnings. Some of these costs include the money you spend on your work wardrobe as well as state and federal taxes.

Think about it, would you buy that new suit if you didn’t work in an office? Or how about those new heels that you only wear for work? Are you being compensated for the money your spending to wear clothes that are appropriate for work? Most likely you aren’t so be sure to include that when calculating your real rate.

Taxes are one of the costs that everyone knows about but seems to overlook. The hourly rate that you are making is a pretax rate, so once again you’ll need to factor this into your calculation for your real hourly rate.

Calculating Your Rate

Finally we have made it to the part you’ve all been waiting for, calculating your real hourly rate. For simplicity sake, let’s use our imaginary friend Jon as an example. Jon works full-time, that is Monday-Friday 40 hours per week, and he makes $60,000 a year. When asked what his hourly rate is Jon divided his annual salary by the number of weeks in a year and then divided that by the hours he works per week to come up with his hourly rate of $28.85. (60,000 / 52= 1,153 / 40= 28.85) Jon believes he is making $28.85/hour at work but he has not considered the factors mentioned above, so what is Jon’s real hourly rate. Too keep this simple let’s use the numbers below:

Morning Prep = 1 hour per day, 5 hours per week
Daily Commute = 46.2 minutes per day, 4.35 hours per week
Unwind Time = 1 hour per day, 5 hours per week
Work Attire = $500 per year, $0.24 per hour ($500/ 52-weeks / 40 hours per week)
Taxes (22%) = $13,200 per year, $6.34 per hour. ($60k*22%= 13,200 / 52-weeks / 40 hours per week)

Alright stick with me, I know math can get confusing. In an average week, Jon is physically at work for 40 hours. If we add his weekly morning prep, commute, and unwind time he spends 54.35 hours per week on work related activity. Jon’s hourly rate is now $21.23 and is calculated as such $60,000 / 52-weeks = $1,153 / 54.35 hours per week = $21.23.

Now we subtract the hourly costs for work attire and taxes that we calculated above and we find out that Jons real hourly rate is…. $14.65. His real hourly rate is $14.20 less than what he believed was has hourly rate!

Closing Thoughts

I’m guessing that you may be a little shocked right now and that is great. Becoming aware of your real hourly rate can be extremely beneficial for you financial well-being. Now that Jon realizes that he is really making $14.65 per hour he may spend his money differently. He may even start looking for a new job that is less stressful and closer to home. This would cut down on the time he spends commuting and unwinding which would increase his real hourly rate.

If you are thinking about taking a new job that pays more but is farther from home and may require you to work extra hours then I would suggest calculating what your real hourly rate would be. Take that estimate and compare it to your current rate and see if it’s still worth it. You may find out that you would actually be making less for the time you will be committing.

I hope this article was helpful and remember that time is our most valuable resource. As always, please share with your friends and his us up in the comment section with any questions 🙂

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