To determine the true hourly cost of your job, you must consider all the time spent on job-related activities, including commute time, work prep, and decompression time. For instance, let's assume you work 8 hours a day, with a 2-hour commute and 1 hour of work prep, totaling 11 hours of daily commitment. If your daily earnings are $400, your true hourly rate would be $400 / 11 hours = $36.36 per hour.
Calculating True Hourly Rate with Stress Costs
Stress costs can be factored into your true hourly rate by estimating the annual expenses related to job stress, such as therapy sessions or medication. Suppose you spend $1,000 annually on stress-related expenses and work 2,000 hours per year. Your stress cost per hour would be $1,000 / 2,000 hours = $0.50 per hour. Using this figure, you can adjust your true hourly rate: $36.36 (true hourly rate) - $0.50 (stress cost per hour) = $35.86 per hour.
Reframing Career Decisions with True Hourly Rate
Understanding your true hourly rate can significantly impact your decision to keep or quit your job. Consider the following examples:
- If your true hourly rate is $30, you may want to explore alternative career options that offer higher true hourly rates.
- If your true hourly rate is $50 or more, you may want to stick with your current job, as it provides a higher true hourly rate.
- If you're considering a side hustle, calculate its true hourly rate, including commute time and work prep, to make an informed decision about whether it's worth pursuing.
For example, let's say you're considering a side hustle that pays $30 per hour but requires 1 hour of commute time and 30 minutes of work prep. Your true hourly rate for the side hustle would be $30 / 1.5 hours = $20 per hour. In contrast, if you can work from home and eliminate commute time, your true hourly rate would increase to $30 per hour.
Using the Freedom Calculator, you can factor in these stress costs and get a more accurate picture of your true hourly rate. The true hourly rate concept, also known as your real hourly wage (the wage that reflects all the time and costs associated with your job), can help you make more informed decisions about your career and financial goals, which is a key aspect of achieving FIRE (Financial Independence, Retire Early).
Here's a step-by-step calculation to determine your true hourly rate:
- Calculate your total daily time commitment, including commute time, work prep, and work hours.
- Determine your daily earnings.
- Divide your daily earnings by your total daily time commitment to get your true hourly rate.
- Factor in stress costs by estimating your annual stress-related expenses and dividing by your annual work hours.
- Adjust your true hourly rate by subtracting your stress cost per hour.
New to FIRE? See our primer at https://freedomcalc.app/what-is-fire.
Ultimately, understanding your true hourly rate can help you make more informed decisions about your career and financial future, allowing you to prioritize your goals and values. For instance, if you find that your true hourly rate is lower than expected, you may want to consider negotiating a raise or exploring alternative career options.
Tools worth looking at
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- Empower — Free net worth tracking, portfolio analysis, and retirement planner. The dashboard serious FIRE chasers actually use.
- Acorns — Round-ups that invest your spare change automatically. The lowest-friction way to start investing if you have been putting it off.
- Wealthfront — Tax-loss harvesting, a 5% cash account, and direct indexing once you cross $100k. Solid robo for the set-and-forget crowd.