YMOYL Chapter 2, Part 1: Calculating Your Real Hourly Wage

A quick reminder: This is an in-depth, chapter-by-chapter review and analysis of the book Your Money Or Your Life. If you haven't yet read the book, you're going to need to read along to know what I'm talking about. Join us! You can buy YMOYL here, and you can find the first post in the series here.

I'm going to break Chapter 2 down into a two-part post. Today, we'll cover definitions of money and go over the "real hourly wage" calculation. Next week, we'll cover the "daily money log" portion of Chapter 2.

Money is a strange thing. We have baggage about it, we project our feelings and emotions onto it, and yet, honestly, many of us don't really know exactly what it is. Our society is already awash in pat definitions and ego-protecting perspectives for money, most of which encourage us to forget everything and buy stuff so we'll feel better about ourselves.

Forget all that. What we need is a way to think about money that helps us manage our financial lives more effectively. How can we take back our power over these little pieces of paper sitting in our wallets?

What does money mean to me? Before we get to YMOYL's definition of money, I want to ask readers what does money mean to you? Feel free to share your thoughts in the comments.

And since this is my blog, I'll share my definition too: For me, money provides time and flexibility. A simple example: using a time-based framework for money, you can take the amount of spare money you have, divide it by your expenses per month, and you'll know the number of months you can afford to not work for money. That time is yours--not your boss's time, your clients' time or your company's time.

Here's another way to think about money in time-based terms: every act of spending must be matched with time spent earning money to pay for that expenditure. Of course, it's a giant irony that many of the things we buy with money merely weigh us down and create the opposite of flexibility.

I also try (with mixed success) to see money as an intellectual challenge--like a game I can play for fun. This part of my definition of money is in many ways the most useful, because it helps me look at money in a less emotional, more carefree way. It's my way of taking back my power over money. Hey, whatever works.

Is my definition right? Is your definition right? These are the wrong questions. The right question is: is your definition of money effective? Does it help you take back your power over money, or does it "help" you give your power away?

Which brings us to YMOYL's definition of money:

Money is something we choose to trade our life energy for.

I can't say their grammar turns me on, but I'll give our intrepid authors credit for offering a solid, mind-opening definition of money. It frames money as a choice (do you choose to trade it away or not?) and it frames money in terms of time. And as we'll soon see, it's both useful and empowering.

Life energy? Isn't that a little, uh, airy-fairy? I'll confess, when I first read YMOYL ten years ago, I rolled my eyes at this point of the book too. I had to wrap my mind around this chapter--and in particular I had to wrap my mind around the "real hourly wage" concept--before I really understood what the authors were trying to achieve with their definition. Let's give the authors a little extra rope here.

Your REAL hourly wage: Okay. The most important idea in this post (and perhaps the most important idea in all of YMOYL) is on pages 57-66 where you calculate your real hourly wage. This is where you take your actual wage and adjust it for all of the various extra costs and time demands your work life places on you.

If there's one section of this book that will help you substantially rethink how to balance life, work and money, this is it.

Be warned, the number you arrive at may depress you. Initially. But keep in mind: the entire point of the real hourly wage calculation is to help you understand all of the costs you bear by working. It may give you certain information that encourages you to leave your current job--or at the least, consciously alter the expenses you choose to bear while you're at that job. Furthermore, it can be an extraordinarily useful number to help you choose your next job. As the book says, "a job that requires a longer commute or has more costuming expectations might be less remunerative in reality than one with a lower salary."

Before taxes or after taxes? A quick side note: I disagree with the book's calculation mechanics. They tell you to start with your gross wage. I think you should start with your after-tax wage (the "net pay" number on your pay stub). Think about it: almost all of your expenses are paid for in after-tax dollars, so it's not really fair math to use pre-tax dollars as your starting number. In essence, your pre-tax, gross wage is really a phony number. Only the government can get at your gross wages. You can't.

Understanding the true cost of your spending: Here's what's even more important about your real hourly wage: it helps you quantify your spending in terms of how many more hours you'll need to work to pay for any given purchase.

This is a staggering insight for many readers. You want to lease that new luxury sedan you just saw on TV? The down payment alone is gonna cost you 150 hours of life energy, and the lease (plus the added insurance costs) will hit you for another 20 hours of life energy every month. Every month. Hmmm. Maybe I'll keep my Honda for a couple more years after all.

How many hours of life energy does your house cost? Private school? Your timeshare? The $1,620 a year you spend on cable TV?

Let me say it again: this is an empowering framework for thinking about money. We are all making a trade when we work and spend. Now you know an extremely accurate way to measure that trade. Is it really worth it to you?

Big city living: The real hourly wage framework also reveals the true math of living in expensive cities. The bottom line? The economics can get ugly in a hurry. You may think the extra fifteen grand you "earn" in gross salary makes it worth it to live in metro Washington DC, metro New York or some other high-cost location. Sadly, this can be one of the worst lies of urban professional life. Once you look at your true costs in all their naked glory, that extra salary simply may not be worth it.

What path are you on? Does your job really help you build wealth? Do your lifestyle and spending decisions really make sense? Most people never think through this at all. Instead, they allow their expenses and lifestyle decisions to be set by passive factors like social conditioning, or competition with their friends and neighbors.

Let's be brutally honest here: that's a recipe for working twenty or thirty years and not having much money or life energy to show for it. The sooner you recognize this and get your mind around the exact math and economic implications of your life, the better.

Uh-oh. It's that pesky ego again: At this point, some readers will hear themselves saying things like "I'm not really preoccupied enough with money to bother with this" or "I deserve my lifestyle--why are you so uptight about spending?" or "What the hell do you know about working in a big city?"

If your ego whispers stuff like this, please think carefully about how active or passive you wish to be over the remaining years of your life. Do you really need protection from the truth of your economic situation? How much power do you really want to give away to your ego--and to your money?

Remember, your ego doesn't want you to see the truth. Ignore it, and choose a more empowered and truth-centered perspective for evaluating your current life economics.

Here's one extremely empowering perspective you can start with: The more conscious you are of your true job-related costs, the more you can manage them downward. Therefore, the higher you can make your real wage! Reread that sentence, and then try and tell me you don't have far more power over your financial situation than you thought.

Additional Time Till Civil: One last point. Take a close look at the checklist of life energy costs on pages 64-66. Look on page 65, below where it says "Daily Decompression." There's a few amusing line items here, including recreational substances and time till kids can yell again. Anyone who's ever worked would agree: these really are legitimate costs of working.

Let me make a confession: when I scanned over this list and saw Additional time till civil, I died a little inside.

Readers by now know that I worked in a high-stress, long hours Wall Street job for nearly 14 years before leaving full-time corporate work in 2008. On many days during my career, it literally did take me anywhere from 30 minutes to an hour after I got home to become civil. My ego can be pesky too, and only now can I freely admit how skillfully it shielded me from this truth.

I'd give anything to have that time back.

Appendix/Side Thoughts:
1) "Men do not desire to be rich, only to be richer than other men." This quote from John Stuart Mill (on page 54) could not be more fitting, both for this book and for our society today. It illustrates how comparisonitis is a nearly universal insanity in our culture.

2) One more simple framework for thinking about the high cost of spending: I thought I'd share a slightly different application of YMOYL's framework, one that my father repeatedly told me throughout my childhood: "A dollar spent is two dollars earned."

At first, I was like, "Dad, duh. A dollar is a dollar." That was before I started paying taxes.

Once again, you pay expenses with after-tax dollars, but your gross salary is in pre-tax dollars. Take a good look at your pay stub, and you'll see that once all of the various taxing authorities get paid (Federal, State, Social Security, Medicare, etc), you only end up with about half of your gross wages. Half.

(PS: Don't let this make you angry--that's just another example of giving your power away. Instead, let this provide you with still more incentive to save even more relentlessly, and more incentive to supplement your tax-disadvantaged salary income with tax-favored income sources like dividend-paying stocks, municipal bonds and so on.)

Once again, in order to pay that dollar you're about to spend, you need to earn two dollars in wages. This simple phrase has been more valuable to me than an entire library of personal finance books.

3) A mistake only a geek could find: There's a somewhat embarrassing mistake in the 2008 edition. Note on the chart on page 62, where it cites a "real hourly wage" of $6. Then, directly underneath the chart, note where it says "Every dollar spent represents 15 minutes of life energy."

Wrong. If you earn $6 an hour, then it takes you one-sixth of an hour to earn one dollar. That's ten minutes, not fifteen. Oops.

I'm guessing that the "15 minutes of life energy" quote was just copied from the the 1990s edition, which used $4 an hour in this example. Of course $4 an hour actually does work out to 15 minutes per dollar. I wonder, though: what does it mean that there's a 50% increase in "real wage" inflation from one edition of YMOYL to the next?

Next week: YMOYL Chapter 2, Part 2: Keeping Your Daily Money Log

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Ryn said...

This exercise was illuminating for me, although not exactly in the way the book describes. Before I did the math, I expected my real hourly wage to be slightly below minimum wage. It was actually a fair bit above minimum wage.

I realized that I'm not working low paying temp jobs anymore. I don't have to live like I'm broke unless I want to, which means I need to figure out what my goals actually are and what I want to do with the money I'm making.

For example: right now, I have more than $9,000 in my checking account. That's not something I planned, it's the result of letting it accumulate for months while I ignored it. There's no good reason for me to keep that much money in the account I use for everyday expenses, so I need to decide what I'm going to do with that money, and why.

Daniel said...

I like your thinking. And you raise a good question, one that I look forward to covering as we move along in this series: What's the "right amount" of liquid cash to have on hand? And what do you do with anything above that?

Of course, you've solved the key preliminary problem: you've set your everyday expenses at a level that's enabled you to save up this great war chest of cash in the first place. :)

Thanks for your comment!

chacha1 said...

I think I have gleaned a lot of YMOYL over the years without having read the actual book.

Haven't calculated my "real wage." I feel so blessed in my life right now that I'm not sure I could be objective.

A few years back I was in a terrible job and only managed the last four years because I was walking to/from work, through a lovely neighborhood.

Without that decompression time I would have been even more miserable, and as it was, I had insomnia, disordered eating, and was drinking too much.

I stayed in that job ONLY for the high wage, but ended up spending every cent, so what was the point? I had to take a 30% pay cut before I could save any money. Dumb.

Letseat said...

I have calculated my real hourly wage in the past and appreciate the exercise and the intent behind it.

I had to laugh at the way it was presented in the book though. I can assure you that whether I have a stressful job or not I will still occasionally veg on the couch, drink alcohol, and go out with friends. Definitely some of the reasons for those activities may change though!

Daniel said...

Chacha, given your experience with your higher paying job, you've pretty much got your arms around one of the key concepts of this book.

You're one of the readers whose thoughts I'd like to hear most about this book. If you do end up reading it, please be sure to share your thoughts--here or on your own blog. Deal?

Letseat: I hear you, and I feel the same way about some of these spending categories too. I guess you have to do your own honest assessment of how much of each of these things is truly "decompression time" and how much is something you'd do anyway. For me, "additional time until civil" was pretty easy to categorize :) while others, not so much. Great point.


oilandgarlic said...

I admire how much detail you go into on this book as I could only manage to post my random thoughts!This was one of the most eye-opening chapters for me. Sort of depressing but definitely gives most people something to think about. Most forget to figure how many hours they're working for their wages.

Daniel said...

Thanks OilandGarlic, I appreciate the compliment. But give yourself credit: you are carefully reading the book and clearly open to the ideas in it. Doing both of those things is beyond most people, quite frankly. Keep sharing your thoughts and insights!


Kathryne said...

I know this series is ancient in internet-years, but I just got my hands on the book. I do have a question, if indeed you are still checking these comments. As a waitress, my hourly wage varies greatly from day to day, sometimes predictably (Saturday nights are busier than Mondays) and sometimes not. I'd like to be able to complete all the exercises as listed, but am not sure how to get around this snag. Would a low-average estimate be good? I'd appreciate any advice you or other readers might have!


Daniel said...

Kathryne, this is an excellent question. (And yes, I do check all comments at all times here at CK!)

And I think you're on the right track: average enough days so that you can take into account the busy and slow days. Perhaps you might want to start with your weekly earnings divided by the total number of hours worked over those seven days. You could also look at it monthly too.

You can check the sample by, every so often, choosing another random week (or month) in the future and doing the same exercise. If you arrive at a fairly similar "real hourly wage" across a few different sample weeks, good: your numbers are probably reliable.

One idiosyncrasy you'll face is how to treat tips. I always tell readers to use their after tax income to work out their real hourly wage, so you'll want to reduce your tip income by the amount of tax you end up paying too. Just something to think about.

Good luck, and please keep me posted on your progress!


Juli said...

One of the most interesting takeaways from this exercise was just how much resistance I have to each step of this process.  The exercises somehow seem unnecessary, and I keep trying to mentally talk myself out of having to do them.  But when I actually sat myself down to calculate the real hourly wage, it took me... maybe a minute?  Why did I spend so much effort trying to rationalize my way out of a MINUTE'S worth of work???  o.O

Silly ego.