You’re Thinking About Your Hourly Rate All Wrong
By: Matthew Kent
Tags: Investing, Personal Finance, Entrepreneurship, Life, Self Improvement

Photo by Nathan Dumlao on Unsplash

Most people have at least somewhat caught on to the fact that time is a valuable resource and should be, well, valued.

Every now and again I hear something that indicates that someone has worked through the basic concept of how they value their time and are using it to make decisions.

The problem is they usually don’t do it well.

Most people seem to take their salary, divide it by the number of hours they work, and boom, they have a calculation for what their time is worth.

So if you make $50,000 a year, your time is worth roughly $25 an hour.

Under this framework, if you’re making $25 an hour and thinking of picking up some extra work on the side, you should scoff at something that looks like it might bring in $15 an hour, right?

You can also confidently say that it only took you an hour at work to make enough money to pay for that $25 meal, right?

Don’t be so sure. Here are five reasons why your hourly rate calculation doesn’t make much sense and your thinking needs an overhaul.

1️⃣ Context is King

If you are making three times what you are spending, then using your current hourly rate to value your time makes sense.*

You don’t need to be wasting your time when you already have plenty of money.

On the other hand, if you are struggling to make ends meet, you don’t really have room to turn your nose up at a solid opportunity, even if it’s less than perfect.

If you need the money to dig yourself out of a hole, put away your pride and take what you can get.

*I would actually say that even in the situation of abundance your hourly rate isn’t much good in valuing your time since you should value your time much higher than your current hourly rate

2️⃣ The 8pm on Wednesday Test

You might think you are worth $25 an hour, but can you make $25 from 8–9pm this Wednesday evening?

What I’m getting at is that if you have a salary, you can’t earn more just by working more. In fact, the more you work the less you make per hour.

Your time isn’t truly worth $25 an hour if you don’t have the ability to command $25 for another hour of work.

Ironically this is an area where being paid hourly can be an advantage over being salaried, but only if there is an opportunity to work overtime — which is far from being a given.

3️⃣ The Income/Savings Can Grow Passively

Say you’re 25 years old and making $50,000 a year, or about $25 an hour at your 9–5.

You decide to take on some extra work at $15 an hour and invest it in a total stock market index fund in an IRA. You won’t pay any taxes on this income since it’s going into an IRA.

Let’s just consider the first $15 from the first hour you worked. If we flash forward to the time you are 31 or 32 years old, chances are that your initial $15 is now worth closer to $30.

So how much money were you making an hour? $15? Or was it really $30/hour?

Flash forward to the time you are 40 and the initial $15 investment is likely worth closer to $60. By age 48 it could be $120.

The same thing applies to the time you invest saving money. Money that you save is also tax-free since you paid the taxes when you earned it, and you can invest it so that it grows.

4️⃣ Your True Hourly Rate at Your Job is Worse Than You Think it Is

The way most people think about there hourly rate is to divide their salary by how many hours they work.

So for instance, if you have a regular 9–5 job with a $50,000 salary, you would figure that there are 260 business days a year, minus 10 holidays and 15 vacation days, leaving you 235 eight-hour working days, or 1,880 hours.

$50,000/1880=$26.60/hr.

Simple right?

Nothing is ever that simple. First of all, you forgot your commute. A half hour each way means an extra hour each of those 235 days that you worked, so really you worked 2,115 hours, not 1,880.

Your hourly rate is actually $23.64.

Well, that’s still not bad, right? We went from rounding down to $25/hr to rounding up to $25/hr.

Except we’re not done.

Most people don’t actually work 9–5 since lunch doesn’t count. So you actually work 8–5.

You’re now up to 2,350 hours and down to $21.27 an hour

Not only can we add adjustments to your total hours, we can take them away from your salary as well. The cost of your commute is an expense you wouldn’t have without a job*. So is your professional wardrobe. So is childcare. So are all the vices in your life that help you deal with the stress of your job.

And I haven’t even mentioned taxes yet.

The fact is, you make well less than $50,000 a year on a $50,000 salary, and even when the money you do get to “keep” hits your bank account, some of it goes right back out the door to pay for all the expenses associated with having a job.

This concept of adding in the hidden time commitments of a job and subtracting the hidden costs to find your “real hourly wage” is one of the key contributions of the personal finance classic Your Money or Your Life by Joe Dominguez and Vicki Robin.

*For many people, the cost of their commute is just gas and the maintenance brought on by wear and tear. However, if you have a two-car family that could be a one-car family without your job, the cost of your commute is the entire cost of owning the car including more significant expenses like depreciation and insurance

5️⃣ It’s in Your Best Interest to Blur the Relationship Between Time and Money

The two primary resources at our disposal for making money are time and money.

Money can be invested to passively make more money, but unless you got really lucky, you need to initially make some money some other way to make this strategy work.

That means that most of us are going to need to invest time into making money until we’ve made enough money that we can invest the money to work harder than we can.

Most people have an intuitive understanding of this, but because they only have a vague notion of how to actually make money, they get way too caught up in the connection between time and money.

As I argue in this post, the foundational principle behind making money is that you need to sell something. Yes, you can sell your time, but you might be better off investing your time creating something you can sell besides time.

Just like when investing money, investing time doesn’t yield results immediately, but if you stick with it, your efforts can scale.

For instance, I recently invested some time this year writing and publishing a personal finance book on Amazon Kindle. Although it has made money every month it has been out, I haven’t made enough to have earned a decent hourly wage for the time I put into it.

Yet.

The book can still sell copies even though the work I put in is pretty much over.

Writing on Medium is a similar story. I make some money here every month, but nothing impressive.

Yet.

Each useful story that I write not only brings me some revenue, but it also grows my audience allowing the potential for any given post to make more in the future.

Each post is a new opportunity to discover my writing and for me to prove the value that my insights can offer.

Oh, and just to tie the two time investments together: the followers I acquire on Medium might some day become readers of my book.

It’s hard to do the work necessary to achieve scale, but the nice thing is that your efforts tend to be synergistic, even if it’s hard to see in the beginning.

Putting it All Together

So how should you think about your hourly rate?

Ideally in the long run you wouldn’t think about it at all. The relationship between how you spend your time and how you make your money will have become so fractured that it no longer really means anything.

If money is tight however, that’s not a luxury you can afford. For you, it’s probably worth actually walking through the exercise of calculating your “real hourly wage” that I started in the fourth point.

This will give you perspective into how much of your life your unnecessary purchases are costing you and will motivate you to tighten up the purse strings and find ways to increase your income.

Next I recommend that you start investing your time into creating something you can sell besides time. It could be a product, a skill, anything that someone values enough to pay for.

Your time is precious. Invest it wisely.