Happy Labor Day for those in the United States. Many countries celebrate a similar day throughout the year. In the states, it is a day we mark to celebrate the “contributions workers have made to the strength, prosperity, and well-being of our country.” What the description oddly leaves out is the contributions workers have made to their own strength, prosperity and well-being.
Today’s post will discuss the value of our labor. I will detail a question I often asked myself early in my career because I was frustrated.
Frustrated by the fact that I would bring home a paycheck every 2 weeks only to see 95% of it (sometimes more) disappear before the next one. I started to ask myself, “How much do I really make per hour?” Sound like a question with a fairly straightforward answer, but it is actually much LESS than what you think.
I’m a big proponent of the belief that we need to make ourselves strong first before we can make others strong.
This is why we spend the first 20-some years of our lives learning from others. We don’t immediately posses the skills and knowledge that it takes to run a business or operate some segment of a larger business.
First, we go to school, we learn to read and write, we have mentors, we get some work experience under our belt.
Over time, we develop more skills and we transition to become managers, and hopefully, eventually part owners of a business. The end goal for many is to transition from employee to investor over the course of a career owning various businesses or entire slices of the market to provide a stable source of income in later years.
Some, like myself, might wish to take one final step towards becoming a philanthropist by accumulating more than is necessary in order to give money away later in life.
Before any of this can begin, we need to come back to the fundamental question, which is,
“How much do I really make per hour?”
To figure this out, you can take your annual income and divide it by the average number of hours you work throughout the year. (A depressing exercise when we did it in public accounting given the large denominator in our calculations).
Or, in some cases, employers are already listing out your pay by the hour. Simple. Done.
What we, and I failed to do early in my career, was factor in ALL the various expenses we have.
Without factoring in expenses, we’re only looking at the revenue we bring in WHILE IGNORING the bottom line, our profit.
Right off the bat, taxes are taken off the top. I didn’t know it then, but I wasn’t taking advantage of savvy investment accounts such as my HSA where all contributions are pre-tax, even before FICA taxes (which is Social Security and Medicare taxes).
For me, rent and student loans would take up an entire paycheck. My 2nd paycheck in the month would often be used to pay for food, utilities, house supplies, work clothes, transportation, some entertainment, and every other miscellaneous expense that came up.
I was stressed out because my $/hr was translating to $0/hr for me. I was making zero progress on my employee to investor track.
This is the reason why many of us know multi six figure income earners who stress out about a 5% pay cut. Despite all the income, they’re still living paycheck to paycheck because they have a bottom line of zero.
Thanks to the blogging community, we also know of many frugal and savvy people who make a great amount of profit each month, despite what might appear to be a low level of income.
So, take a look at how much you earn per hour, subtract out all the expenses, and see what your $/hr is from a profit standpoint.
I reviewed my excel file to see what my rate was for the past few years. I’m glad to see a very positive trend.
In Q1 of 2014, my $/hr was negative. I was losing money and had a negative savings rate.
By Q1 of 2015, my $/hr turned positive at $7.78/hr.
When I did this calculation for my most recent quarter, I arrive at about $12/hour.
I’ll encourage you to take the same approach. The most important aspect of this review is to find a positive trend, or work towards creating one. I’ve outlined many of the items I’ve done over the year to increase my $/hr from cutting down on my grocery or restaurant bill to living in a smaller condo relative to my peers, to finding those 1% saving opportunities such as ironing my clothes.
Has your $/hr gone up over the years? Do you share a similar approach where you look at your income from a net profit standpoint?