5/2/2012 4:51 PM ET|
How much money you really make
Before you can calculate how much a job pays, you have to figure out how much it costs. Sometimes a higher salary can actually leave you with less time and money.
One of the most painful realizations I had when I started getting my financial life in order was that I wasn't earning as much money from my job as it seemed.
My salary at the time of this realization was about $40,000 a year, so let's use that as a baseline.
Now, on the surface, that's really good money. If I worked 40 hours a week for 50 weeks a year, I would be earning $20 an hour, right?
Well, that's not entirely true.
First of all, we have taxes. Federal income taxes, state income taxes and FICA taxes. Federal taxes would eat about 11% of my paycheck, state taxes would eat about 4% or so, and FICA would eat about 2%.
Second, I had to pay for my commute. This was about 10 miles each way, and it was the primary reason I owned a vehicle. So, let's tack on top of that a monthly car payment of about $200, about $40 a month in gas, about $30 a month (prorated) in maintenance expenses, and about $40 a month in insurance, just to keep that car on the road.
I also had to wear a nicer wardrobe. I spent $200 a year to make sure I dressed appropriately for meetings, conferences, and the like -- and that's a low-end estimation.
I also ate at least two meals eaten out a week, costing $10 each. There was travel about three times a year, when many of my expenses would be challenged, meaning each of those trips set me back about $100 out of pocket.
Not only that, there were many times where I would put in extra, unbilled hours to meet a deadline. I easily averaged 50 hours a week at work.
Plus, there was the time I spent traveling -- about 50 hours spent going to places I didn't want to be per trip. And there was the time spent commuting -- about 40 minutes per day. There were also work-related meals and other activities to attend, eating an additional four hours per month.
When you start running the math on this, the equation starts to change.
After receiving my $40,000 salary, I'd pay out $6,400 in taxes each year. I'd pay out $3,720 in commuting costs. I'd pay out $200 in wardrobe costs. I'd pay out $1,000 in extra meals each year. I'd pay out $300 in extra travel expenses.
Suddenly, my $40,000 salary became $28,380.
Now, I'd work 40 hours a week, totaling 2,000 hours per year, right? On top of that, I'd add 10 hours of unbilled work a week (over 50 weeks), three hours of commuting a week (over 50 weeks), 150 extra travel hours a year, and 48 extra hours of activities a year. This would bring my total up to 2,848 hours, or an average of 57 hours a week spent devoted to my job.
My job is suddenly paying me less than $10 an hour.
Of course, there were other job benefits that had some significant value, but frankly, I wasn't actually using them. My wife and I sat down and compared the health insurance offerings at our two jobs, and her insurance was far better than mine, so we used her insurance. I had no use for my employer's life insurance option, either, and its retirement plan wasn't particularly strong. These things do have value when you're comparing jobs in this way, but only if you're using them.
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Hmm. Let's analyze these points, shall we?
Taxes: unavoidable no matter what your job. If you want to take a lesser paying job for other reasons, great. If you want to take a lesser paying job simply to pay lesser taxes, you're an idiot.
Commute: unavoidable unless you live within walking distance of your job. Even public commute costs $. But you don't have to pay $200 a month for a car payment - buy used.
Wardrobe: unavoidable if you work with people. $200 a year is not bad for clothes. Oh, and this is tax deductible.
Eating out: you don't have to.
Travel expenses being challenged: your company isn't going to pay for your gambling, fool
Unpaid overtime: this is a company issue. If it happens rarely, you deal. If it happens often, and your company refuses to compensate you, then consider how they treat their employees and move on.
Bottom line: just because you couldn't control your spending doesn't mean your job was not worth it. It just means you didn't know how to minimize your costs.
I make 101K/year. Live in NYC. I reside in the outer borough's close to the city (I hate long commutes and dont own a car). Because of this I pay a hefty housing cost. By the time I pay utilities/phone and Student loans along with Mortgage (which I dont mind paying for my convenience) I have about $1500 discretionary income. I put $1000 into savings (in addition to maxing out retirement) and have $500 "play" money a month.
Me and the BF are thinking of moving in together soon (not because of money) so that will be a HUGE weight off me and him. Thank goodness I dont have kids (yet). No credit card debt (thank goodness) and no car payments (no car). I still have to budget for eating out and such. As I get older Im becoming more cost conscious.
Groceries are even skyrocketing. I use fresh veggies in most my meals and by the time I/we pay for groceries to eat for two every night, we may as well have went to a restaurant! I am mastering making food to last for the week though so Im happy about that. Being a single tax payer my taxes are high as heck! I think everyone can live "comfortable" on thier salary if they plan appropriately (barring any unforseen financial tragedies like divorce or medical issues and loss of job).
Some times eating oodles of noodles isnt so bad! lol
"There was no more travel -- I've only been tempted to travel related to ny new work once, and that one time was canceled due to a family illness."
"ny new work" is spelled wrong... I think it is ny new york.
Also, if you think that clothing expenses shouldn't be factored into your salary calculations, than you need to try working for places that require business attire or even uniforms that you have to pay for. Your clothes need to be in tip top shape as well, so even if you don't update your wardrobe frequently, you still need to think about the cost of regular dry cleaning. I worked in men's suits before and you would be surprised at how much interviewees and new employees would spend on their wardrobe for their new career.
Even though cars are a controversial expense, I feel that people should always include that in their calculations. Just like if you are working from home you should consider your housing an expense. Like it or not, if a job doesn't pay you enough to make that car payment and pay for gas, insurance, and maintenance, than you will have some serious transportation issues down the road.
I think people need to wise up. $40,000 seems like a lot when you don't make that much, but as the cost of living increases and salaries don't, you really need to be more discerning when comparing job offers.
While the article is interesting... I don't agree with most of his analysis. Most importantly, the author should only deduct the marginal increases in cost from his $40k salary. I think he would choose to keep his vehicle for personal use either way, so I would throw out the $200/mo expense, becuase this would be incurred anyway. Same thing with mileage and clothes... unless he has an alternative option of working naked from home, he probably shouldn't deduct the full amounts of these either. Lastly, throw out the overtime hours. I don't know anyone with a salary who averages 40hr weeks. When I started my career in public accounting (long gone now) I thought I was making big money at $55k/yr as a new grad. Until I realized I worked about 3,200 hours per year.
The real and valuable truth in the article: a salaried job will demand significant investments in time an money from employees.
On a side note... I'm all for repealing overtime exemption laws. I think it would be a great market based tool to correct income inequality. Any thoughts?
When I first got married, my wife and I sat down and decided she should quit her job when we decided to have children. Add the cost of child support, another car, lunches, outfits, etc. it makes more sense to stay home and roise your own child!
I know that can be stressful, so when our children got about 2 to 3 years old, we enrolled them in a half-day school. It was agreat decision.
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