28 March 2011

Money: Calculating Your Real Salary

In my favorite book on personal finance, Your Money or Your Life, authors Joe Dominguez and Vicki Robin spend an entire chapter discussing the calculation of one's real salary - information that is later used to better inform choices around spending, saving and budgeting. At its heart, calculating your real salary is a cost/benefit analysis.

First, Calculate Your Time
Depending upon your job description, industry, title and company structure, the time you devote to your job can vary widely. Additionally, if you are a salaried employee, it can be even more difficult to determine how much time you actually put in when you are expected to check emails frequently or come in on weekends or holidays.
If you are in management, or in a profession that regularly requires you to do additional work at home, check email/blackberry after hours and/or work on weekends or holidays, it is best to record your hours like you record your expenses as described here.

Example: For the sake of simplicity, let's say you earn a salary (after taxes and deductions) of $52,000 annually. Since there are 52 weeks in a year, you make $1,000 a week. If you work 40 hours a week, you earn $25 an hour.

But wait, there's more...

How much time do you spend getting ready in the morning? This extra time may be negligible if you don't dress any differently at work than you do on the weekends, but for many people, getting ready for work takes longer than their routine on the weekends or when they're on vacation. Add this time to your work hours.

How long is your commute? Do you stop to pick up breakfast or donuts and bagels for the office on your way to work? Add this time to your work hours.

How long is your lunch or dinner break? Even though you aren't officially "on the clock" you are still either at your job site, or nearby - often with colleagues or clients. Add this time to your work hours.

Example (continued): Earlier, we calculated that your work week was 40 hours. However, let's say you spend an extra half hour getting ready in the morning. This adds 2 1/2 hours to your work week. If your commute is 1/2 hour one-way from your home to your work, this adds another five hours to your week (provided you work five 8-hour shifts per week). Let's say you also take an hour lunch break everyday, adding another five hours to your work week. Now your work week is 52 1/2 hours instead of just 40, bringing your hourly earnings to approximately $19.05.

Next, Calculate Your Work-Related Expenses
Consider the old adage, "It takes money to make money" and you'll understand this next section. There are things you must buy in order to maintain your job: gas money or public transportation passes; special clothing, meals, continuing professional education and more. This is where tracking your expenses over several months comes in handy...

Transportation: You have to put gas in your car to commute to work, but don't forget to include other car-related expenses such as insurance, registration and maintenance. Don't forget to include your car payment if you don't own your vehicle outright. This is easier for a car or truck that is used exclusively for work, but you can estimate the percentage of use of your vehicle for work-related travel for an all-purpose car.
If instead you use public transportation, multiply the cost of a monthly pass by 12 months and then divide by 52 weeks to find the weekly amount. (Example: A monthly pass costs $40 x 12 = $480 annually. $480/52 = $9.23 per week.)

Appearance & Clothing: Do you wear suits and ties to work? Do you require a uniform? Maybe coveralls or work boots or other special clothing that you don't normally wear outside of work? Don't forget any special grooming, accessories or cosmetics that you need to look appropriate for your job, but wouldn't normally wear during your personal time. Don't forget to include dry cleaning costs. Refer to your expense log to determine an average for annual clothing expenses and divide by 52 to calculate a weekly cost.

Meals & Snacks: Do you eat out for lunch? Do you stop by your favorite cafe on your break? Do you buy your lunch at the company cafeteria? Don't include meals with clients or colleagues that you are reimbursed for through an expense report.

Other Job-Related Expenses: Did you buy a briefcase or bag for your laptop that you were not reimbursed for? Do you take classes, exams or re-certification workshops that you pay out-of-pocket? Do you belong to professional organizations, networks or clubs? Do you subscribe to industry-specific periodicals, journals or other media to enhance your job skills? What about tools, reference materials or supplies that enhance your ability to do your job? If you travel for work and must use a personal credit card for airfare, hotels and meals which are later reimbursed through an expense report, don't forget to include any interest or other fees that you pay while you are waiting for your expense check.

Example (Continued):

Transportation Expenses (weekly):
Gas - $40
Insurance - $15
Registration - $3
Maintenance - $18
Total: $76

Appearance & Clothing (weekly):
Clothing: $20
Dry Cleaning: $15
Total: $35

Meals & Snacks (weekly):
Coffee Drinks: $25
Lunch: $50
Total: $75

Total Expenses (weekly): $186

Your Real Weekly Salary:

Base Weekly Salary: $1,000
(Less: Weekly Expenses) -$186
Real Weekly Salary: $814

Hours Worked per Week: 52.5 hours
Real Hourly Salary: $ 15.50

This means that for every 15 minutes of your life, you are earning $3.88. Is that latte or smoothie worth fifteen minutes of your life? Is cable television worth three hours of your life? Some other things to think about...

  • Do you enjoy your work?
  • For the amount of work that you do, and the level of education you have, years of experience, etc., is your Real Hourly Salary a fair wage?
  • Do you find yourself having to "self-medicate" to relieve the stress of your work? (i.e. drinks after work, other mind-numbing activity to decompress, etc.)
  • Do you find yourself living for the weekend? your next vacation? retirement?

Next week, I will discuss a couple of things including using your expense log and your Real Salary to make some informed decisions for your spending and some strategies for getting out of debt.

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