You earn $10 an hour and think buying a $20 CD is the equivalent of 2 hours of work? Not so!
Figuring out what an hour is really worth and the number of hours you have to work to purchase something in particular is much more complicated than that.
How to figure out your real hourly wage
- Take your annual take-home pay and divide it by the number of hours you work a week (usually 35 or 40), and then by the number of weeks you work a year (usually 50). This gives you your net hourly wage.
- Now take the cost of your monthly basic expenses (rent or mortgage, electricity, monthly car payment, insurance, savings and debt repayment). Multiply this number by 12 to get the annual amount and then divide it once more by 35 or 40 (or number of hours you work a week) and then by 50 (or number of weeks you work a year). This gives you the cost of your basic expenses per hour.
- Subtract the amount of your hourly expenses from your net hourly wage. The difference is your hourly disposable income.
- You earn $56,000 a year or approximately $35,000 net. If you work 40 hours a week, 50 weeks a year, your net hourly wage is $17.50 an hour (35,000 ÷ 40 ÷ 50). But this is not your disposable income.
- Calculate your monthly basic expenses. Suppose they come to $1,800; this gives you $10.80 an hour in expenses. (1,800 × 12 ÷ 50 ÷ 40).
- Your real hourly wage is therefore $6.70 (17.50 – 10.80).
Now divide the price of the item you want to buy by your real hourly wage. Do you really want that $200 pair of ultra-trendy shoes, knowing they come to a little over 29 hours of work?