The Real Hourly Wage (RHW) calculation from the book, Your Money or Your Life (which I highly recommend) and the Financial Integrity Program provides a way to compare the price of a product or service to your time required to make that amount of money.
Note, this is a shortened and slightly modified version of the concepts available in the above two resources; if you like this kind of thing, please check them out as well.
One of the main points of the RHW calculation is finding out exactly how many dollars per hour you are receiving from your paid employment. For example, if you are paid $20 per hour and lose 25% to taxes and other deductions are you making $15 per hour? Hardly.
What about all the other monetary costs associated with working? – commuting costs, extra meals out, fancy clothes, educational requirements. Which does your employer pay for and which do you pay for in order to keep working?
And then there’s the time aspect. Does your employer pay you for your lunch time? Your commute? Those hours you spend on the couch too exhausted to do anything else? Probably not.
Here is a very simple example of the calculation:
|Income||Base Take-home Pay||$3000|
|Employer Paid Benefits||$200|
|Expenses||Car and Associated Costs||$300|
|Actual Money Earned ($3200 less $1000)||$2200|
|Time||Base Hours Worked||167|
|RHW||Actual Dollars Per Hour ($2200 divided by 190)||$11.58|
In the above example I used randomly chosen numbers for mathematical simplicity. It works out to roughly $23/hour gross salary, $18/hour after deductions, and less than $12 per hour actually earned.
A real world example would be much more complex. Therefore I’ve designed a spreadsheet to help you do this calculation with your own money. I’ve set it up so that whether you are paid weekly, bi-weekly, semi-monthly or monthly, the calculations will be adjusted appropriately. There is the same flexibility with recording your expenses, as you may adjust your tracking to your pay periods or you may use a monthly method.
Check it out and let me know what you think.
What do you do with this number once you’ve determined it? You use this number to decide if a purchase is worth it. If your RHW is $12/hr and you are contemplating a $60 purchase, you need to decide if it is worth 5 hours of your time. It’s just another method to help you decide how you should spend your money.
The RHW calculation is also useful when comparing two different jobs or determining if it’s cheaper to stay home with your kids.
I have one more math example upcoming and then on to other topics. Do you prefer an analytical approach to budgeting or more of a gut/qualitative approach? Let me know.