How Much are You Really Earning Per Hour?

I think it’s valuable to spend some time thinking about life from a different angle than we’re used to. When deciding whether or not to buy something do you ever think about how many hours you’d have to work in order to pay for it? How would you even calculate this?  If you’re like me, you’d take the purchase price and divide it by your gross hourly wage, but this number is almost irrelevant.  Instead, we should be considering purchases based on our hourly profit.  

“Did you steal that quote from the Dalai Lama or maybe one of the Olsen twins?” – Skeptical reader

No, skeptical reader, I did not. That quote, plus other helpful tidbits, are what you get for free by simply subscribing to this blog.

I’m sure by now you’ve alerted your various family members to the life changing lesson that is about to ensue.  Let’s get started.  So what is your “hourly profit?”  As for sure not Mary Kate Olsen puts it, “Your hourly profit is how much you earn minus all your expenses, divided by the number of hours you had to work to earn that figure.”

Great, let me change that slightly and use it as my own quote.

Our hourly profit is how much we earn minus all our expenses divided by the number of hours we had to work to earn that figure.- Mr. Burrito Bowl.  

Thinking about hourly profit got me also thinking about time and energy, and how we all have to choose how we spend both of those finite resources.  

Nobody works for free.  We all get something out of the deal.  Usually that something is money.  Once we have enough money to survive, we start working for a combination of prestige, a sense of fulfillment, a more comfortable life, a gold plated toilet, etc…  This is basically Maslow’s Hierarchy of Needs.

It’s objectively interesting to think about the relationship between the things we spend our money on and how much of our time it takes to acquire those things.  I mean it’s interesting when compared to thinking about algebra or something. It’s not very interesting if you were thinking about space, but then switched to thinking about how many hours it takes to buy something.   I guess it’s subjective. 

Look at your purchases NOT in terms of pre-expense earnings but in terms of post-expense profit

Did you have to reread that a couple of times?  I’ve read it several times and I still don’t get it.  Subjectively, I think it makes sense though.  So we need to ask ourselves: How many hours of labor am I trading for this purchase?

When we buy new clothes, a fancier car, Japanese throwing knives, or a bigger house it makes us feel good, but why does it make us feel good?  Maybe it’s because other people will see us in a slightly higher regard than they would have if they happened to see us wearing our old clothes, driving our beater car, not owning Japanese throwing knives, or living in a modest house.  We have to ask ourselves if being seen in these social upgrades is worth the time spent acquiring the money to purchase them.  

“Come on Mr. Burrito Bowl! Give us some MATH!!”- Anonymous

How do you figure out how many hours of labor are required in order to make a purchase?  Most people who bother to do this, which is admittedly almost no one, simply use the equation: purchase price/gross hourly rate = How many hours of labor it took to purchase said product. This is faulty logic and it gets people into financial trouble.  In order to see why, let’s do a quick fictional case study.

Actually, most people don’t bother to do any equation before making a purchase and THAT is what gets them into financial trouble.  I’m not sure too many people who bother with the previous equation are in dire financial straits.  They are incorrect, but they are probably doing fine financially speaking. Anyway, back to the fictional case study at hand…

Please welcome fictional character Darrell to the article.

Darrell makes a decent wage at $20/hr fixing old mailboxes and he works full-time at 40 hours per week.  Most towns don’t need a full-time mail box fixer but Darrell goes around every Friday night and destroys most the towns mailboxes with a baseball bat. He wants to buy a limited edition Nascar jacket with a Budweiser logo on it for $150 because he’s a moron.  No problem right?  His gross pay is roughly $3,466/month. Assuming 52 weeks/year, this translates to $41,600 per year.

Before purchasing, Darrell does the math to see how much this Kid Rock friendly jacket would cost him.  He estimates it would cost him about 7.5 hours of work ($150/$20 per hour = 7.5 hours), basically one shift.  Darrell justifies his purchase by saying it only took him 7.5 hours of labor, out of a possible 173 hours this month, plus it comes with a free blow up Budweiser chair; a $13 value.  He works really hard and he’s earned it gal-darnit!

Unfortunately for Darrell, his choice in fashion is really costing him more than just 7.5 hours of work because he isn’t buying this $150 jacket with his initial hourly rate of $20/hr.  This formal, yet casual, jacket is really paid for with the money that’s left over after all his expenses are taken out. They’re paid for by his hourly profit.

Hourly Wage vs. Hourly Profit

Darrell’s spending power is far less than the gross sum he earns per month because a large percentage of his paycheck is already spoken for.  Out of the $3,466 he earns per month, the government is going to take roughly $966/month in taxes between Federal + State.  His net pay is actually closer to $2,500/month. But even after taxes are taken out, we still haven’t arrived at his hourly profit.

After taxes he has to pay rent.  Darrell and his cousin, also named Darryll, but spelled with a Y, rent a two bedroom house and pay $1600/month where they split the rent 50/50.  His portion of the rent is $800, so he’s down to only $1700.

He also has to take out his car expenses.  He has to commute 15 miles to work and he wants to look awesome so he bought an old Chevrolet El Camino a few years ago.  This car doubles as his pool though so it’s actually a pretty frugal purchase, as far as pools go.  The car itself was only $317 dollars but the ongoing repairs ad up.  Random things leaking + gas + insurance, let’s say $400 total. He has more expenses and he’s already down to $1300 of profit.  I’m sure you can see where this is going.

His share of the groceries is $420.  He spends roughly $80/month eating out on days he doesn’t pack a lunch to work.  Now he has $800 left.  Yoga class is $200/month.  Darrell is full of surprises. $600 left.  Cellphone? $520. Plenty of cases of cool refreshing Budweiser to celebrate America turning another day old?  $460 left.  Enough water to continually fill and refill a leaky El Camino swimming pool? $400 left.

Pretty soon he’s down to about $400 of profit for his month of work and that’s if he can manage to save $400 every month.  Some months Wheeler Walker, Jr. is in town and he’s not NOT going to get tickets.  Wheeler Walker, Jr. isn’t in town more than once or twice a year though so most months he saves $400.  Your typical American will blow way past that and end up spending close to, or even more than, their total gross pay for the month.

So how long would Darrell have to work to pay for that $150 jacket?

Being nice we are going to assume fictional character Darrell has managed to end the month with $400 left over.  His hourly wage is $20/hr but not his hourly profit.  His hourly profit is $400/173 hours which equals $2.31.  Darrell is making a measly $2.31 of profit for every hour he works.  Now the equation becomes $150/$2.31= 65, which means that $150 jacket really costs Darrell about 65 hours of work. 65 HOURS!!

Darrell is making $20/hr but $17.69 is already spoken for.  He’s actually only making $2.31 profit for each hour he’s working.

Is that awesome jacket worth an additional 65 hours of work to you?  Wait, don’t answer that.  Now imagine buying a new Lexus or a house with two or three extra bedrooms.  YIKES!

Again, that’s being generous and assuming Darrell is making a profit of $400/month. He bought a practical car, only drinks a few cases of Budweiser per month, and he lives with his cousin.  How many people are fortunate enough to be making $20/hr? How many people are living as frugally as Darrell?  If you’re barely making ends meet, then that jacket really costs way more than the 65 hours of labor.

This is the double benefit of frugality

If Darrell opts to not buy the jacket, he’s essentially saving himself 65 hours of work.  What if he were to stop drinking that sweet, sweet Budweiser and only filled his El Camino pool with natural rain water? He’d save himself another $120/month.  If he packed a lunch instead of going out to eat he’d save another $80/month.

Add just those few changes together and he could be looking at ending the month with $600 of savings instead of $400.  That would increase his hourly profit from $2.31/hr to $3.47/hr.  That might not seem like much but he basically gave himself a 50% raise.  If you multiply that out over an entire year, Darrell would have $2,400 more earning $3.47/hr rather than $2.31/hr.

Darrell is already pretty frugal and he’s still only making an hourly profit of $2.31.  If he chose to live alone, leased a new BMW, or went out every weekend, he wouldn’t have an hourly profit at all.  He’d be hopelessly in the red.

Sad Fact: If you have less than $2,080 saved up at the end of the year, then your hourly profit is less than $1/hr. The hourly profit for most people is almost nothing.

What is your hourly profit?

Before you think these hourly profit numbers are unrealistically low, consider this:  If you earn a profit of just $2.31 for each hour you work, you’ll have $4,805 saved up by the end of the year.  If you increase your hourly profit to $3.47, you’ll have $7,218 saved up by the end of the year.  Anyone have $7,200 laying around?

What if Darrell and Darryl decided to move to a cheaper apartment that only cost them $1000/month? Darrell would be saving an additional $300 for his portion of the rent.  In that scenario, his hourly profit would be $5.20/hr.  Multiply that over an entire year and he would have saved $10,821 that he can put towards investments every year.

If through frugality he increased his hourly profit from $2.31/hr to $5.20/hr, that $150 jacket would now cost him a little less than 29 hours of labor.  Still longer than I want to work for a Budweiser jacket, but not nearly as bad as 65 hours.  If they made an Even More Jesus Stout jacket, we may be having a different conversation.  A Budweiser jacket for 29 hours of labor?  No thanks.

HA! You know what would be hilarious? If someone sent us a case of Even More Jesus Stout!  Or really any Imperial Stout or Porter.  That would be so funny.  Oh man.  Anyway, back to the article...

With our hourly profit in mind, how much should we spend on nonessentials?

Back to the real world.  You can refuse to shower or spend any money on personal hygiene and be repulsive to those around you.  That’s taking frugality to an extreme.  Nobody wins when we’re too frugal to shower. 

I’m for sure not advocating that any money spent is a bad thing.  I just think people should consider how much of their time their purchases actually cost them.  

Weigh the benefits of your purchases by thinking of your money in terms of hourly profit instead of gross hourly wage.

If we use our hourly profit as a parameter, it will help guide our choices.  For a frugal-minded person it’s an interesting question.  How much of your time does each purchase really cost?

Conclusion:

The actual hours worked in order to pay for anything is more than simply the purchase price divided by your gross hourly wage.  Calculate your hourly profit and make sure you’re getting at least that amount of value out of the purchase.

Do the quick math and figure out how much of your time a purchase is going to cost you.  Make sure you’re using your hourly profit, not your gross hourly wage.  The main point is to make sure your hard-earned dollars are going towards purchases that improve your quality of life.

What do you think?  Is my hourly profit calculation way off?  Should Darrell just buy the jacket?  Can you use an El Camino for a pool? What else do you consider when making a value judgement on your purchases? Let us know what you think in the comments!

Hey, I think you’d also like one of these articles,

The Hedonic Treadmill and Pursuing Happiness

Financial Independence and the Art of Travel Hacking

In a World Full of Plants…Be a Weed

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