It’s hard to take a pay cut. We live in a world where our sense of self-worth often feels tied to the work we do and the dollars attached to it. Taking a pay cut can feel like a hit to the ego.
When I quit my toxic, full-time job in 2018 and went back to work part-time in 2019, it meant taking a significant pay cut. Part of this pay reduction came from the decision to work 60% (3 days/week) rather than a full-time, 5 day per week role.
I also took a reduction in pay rate as well. My full-time equivalent salary (i.e. if I was working 5 days/week) for my new job would be 15% lower than my full-time salary in my previous (but super stressful) job.
Granted, I did take a step down in responsibilities. I also knew I would be working in a better work environment. Even though the pay cut seemed worth it, it was still a hard pill to swallow.
This came at a point when I was just beginning to disconnect my self-worth from my salary.
I knew this choice would give me plenty of time and energy to focus on my health, relationships, and passion projects. Making a certain amount of money wasn’t a deal-breaker for me, but it was still unsettling.
Then, I remembered a concept called the “True Hourly Wage” from the book Your Money or Your Life.
I calculated my True Hourly Wage from my previous full-time job and my new part-time job. I realized that my True Hourly Wage for the part-time job was actually quite a bit higher than for my previous full-time job.
You are probably wondering how could it be possible to have a lower pay rate and a higher true hourly wage? Let’s get into it.
What is Your True Hourly Wage?
In the book Your Money or Your Life, the authors encourage us to look beyond our actual salary and include other costs – both monetary and time. Taking all these things into account allows us to calculate our True Hourly Wage.
True Monetary Costs
When we think about how much we make, we typically think of our salary only. We don’t usually take into consideration the money that we spend so that we can work at this particular job.
Examples of other monetary costs associated with our employment include:
- Transportation Costs: This includes the cost of gas, car payment, depreciation and maintenance of a vehicle if you drive to work, and/or the cost of public transportation. In my previous job, I drove to work so I needed to account for the cost of gas and maintenance and depreciation of my car.
- Extra Food Costs: This includes any extra money you might spend on food that you might not otherwise, such as coffee, lunch, etc. I usually brought food with me, but I inevitably would end up eating lunch in the cafeteria about once/week.
- Clothing and Grooming Costs: For your job, you might have a particular dress code or a uniform. This typically requires you to cover the costs of work-appropriate attire which can be quite expensive. My previous office and my current office both require business casual clothing, so I don’t spend much extra money on clothes.
- Convenience and Escape Spending: Because of the stress and unhappiness that we experience as a result of our work, we might spend money on things to make it feel more bearable. This would include extra spending on things like take-out, restaurants, easy-to-make groceries, luxury travel, etc. Some of these things you might do regardless of whether you work, but I will caution you to consider what is extra. In the first year after I quit my toxic, full-time job, we realized that we spent $17,000 less than the year before. We could attribute the spending almost exclusively to things like groceries, restaurants, travel, and general merchandise.
True Time Costs
When we think of a full-time job, most of the time we think only of the standard working hours. For people in the United States, that’s typically 40 hours/week.
The true time cost goes well beyond this. Here are additional things you should consider when calculating true time costs:
- Extra Hours: Do you actually only work the required hours? Depending on the career field that you are in, you may be required to work extra hours consistently. In my current part-time job, I rarely work more than 24 hours/week. My previous role required me to work extra hours. In fact, I rarely worked fewer than 50 hours/week.
- Time Spent Commuting: This includes the amount of time it takes for you to get to work. In my previous role, my drive to work was 45-minutes each way, so it added a full 90 minutes onto my day, even when there wasn’t traffic. Before the COVID pandemic, my new commute is 20 minutes each way using public transportation. My commute time was cut in half, and now it’s non-existent.
- Time Spent Getting Ready for Work: Do you spend any extra time getting ready or preparing for your day on workdays? Personally, I don’t spend a lot of time getting ready for work, so I don’t include this in my equation. However, certain people in certain types of roles spend much more time than I do getting ready.
- Detoxing from Work: How long does it take you to detox from work each day? I will say that I’d be so exhausted after a 10-hour workday and a 45-minute evening commute that I wouldn’t be able to do anything in the evening besides detox. Now, my job is much less stressful, and I only need about 30-minutes/day on my workdays to detox.
I’d encourage you to think through other monetary or time costs that might go away if you weren’t working this particular job. If you come up with any, make sure you include them in your equation.
How do You Calculate your True Hourly Wage?
If I was looking at a traditional hourly rate, this is what the equation would look like:
Full Salary / 52 weeks / 40 hours/week = Hourly Rate
Let’s use an example. Jennifer makes $80,000 (before taxes) and works full time. This means that her regular hourly rate would be:
$80,000 / 52 weeks / 40 hours = $38.46/hour
To calculate someone’s True Hourly Wage, we need to incorporate all of the additional money and time costs associated with employment. The equation would look something like this:
(Full Salary – Annualized monetary Costs Associated with working) / 52 weeks / Actual # of hours spent per week working, commuting, and preparing for and detoxing from work
To calculate Jennifer’s true hourly rate, we’d need to incorporate all the additional money and time costs associated with her employment.
Additional Monetary Costs
- Transportation: Jennifer commutes to work using public transportation. She pays for a monthly pass that costs her $100/month. This costs her $1,200/year.
- Extra Food Costs: Jennifer does a good job bringing coffee and lunch from home, but she ends up grabbing both coffee and lunch about once/week. This costs about $20/week or about $1,000/year
- Clothing and Grooming Costs: Jennifer’s job allows her to dress casually, so she doesn’t spend additional money on work attire, so she doesn’t include this in her calculation.
- Convenience and Escape: Jennifer finds herself ordering take-out once/week because there’s usually one day each week that she’s too exhausted to cook. This typically costs her about $25/week, so about $1,300/year. She likely has additional convenience and escape costs but decides to not pinpoint any others.
All additional Monetary costs: $3,500/year
Additional Time Costs
- Extra hours: Jennifer’s job is fairly demanding – once/week she works late, so works about 43 hours/week on average.
- Time spent commuting: Her commute on public transportation is quite long. Most days, it can take her about an hour to get from her home to work. This includes time spent walking, waiting for the train, and then walking from the train station to work. This means that she spends about 10 hours each week commuting.
- Time spent getting ready: Jennifer doesn’t spend too much time getting ready, so she decides not to use this in her calculation.
- Detoxing from work: Jennifer is pretty good at disconnecting from work. She guesses that she spends about 30 minutes per day detoxing from work. This comes out to 2.5 hours/week.
Total hours per week: 66.5 hours
Calculating Jennifer’s True Hourly Wage:
($80,000-$3,500) / 52 weeks / 65.5 hours = $22.46.
Wow! Jennifer’s True Hourly Wage is only $22.46. When we include all the other time and monetary costs, her True Hourly Wage is 42% lower than her regular hourly rate.
As a note, I did these calculations before taxes to make it easier to follow. In actuality, the pay that she sees would be lower after taxes.
Comparing True Hourly Wage Between Jobs
To compare the True Hourly Wage of different jobs, you simply need to calculate your True Hourly Wage for each role. Then you can find the difference.
I calculated my true hourly wage for my previous (full-time) role and my current (part-time) role. Here I’ll share two scenarios. When I first did this calculation back in late 2018, I did not realize the magnitude of my convenience and escape spending.
Without convenience and escape spending, my True Hourly Wage for my part-time job is $7/hour higher. If this were for a full-time job, it would be the equivalent of making an extra $14,560/year ($7 x 52 weeks x 40 hours).
When I include the $17,000 of convenience and escape spending in the True Hourly Wage calculation for my previous job, my True Hourly Wage for my new job is about $12 higher per hour. That would come out to be over $24,960/year if I were working full-time.
While I now make a lower salary (and pay rate), I know that each hour of work at my part-time job is worth a lot more to my employer (and to me).
As a result of the shift, I spend less on commuting, convenience, and escape. I also spend less time working, commuting, and detoxing. This means that I have more time to do things that I enjoy that add value to my life.
Ways to Increase Your True Hourly Wage
Most people think that the only way to increase your hourly rate is to increase your salary. It is definitely one important way to increase your True Hourly Wage. As someone who started her career with a very low income, I needed to increase my salary significantly before I was able to scale back.
Once your salary provides you with enough to cover your everyday expenses and to save a little, you can start to focus on increasing your True Hourly Wage in these three ways.
- Decrease your commuting costs (and time) – There are so many ways to decrease your commuting costs. You could negotiate to work from home more often (even after COVID), get a job that’s closer to your home, carpool with colleagues, or become a one-car family, etc. There are many options if you get creative.
- Work fewer extra hours – A schedule reduction usually comes with a pay reduction, and this might not be the answer for everyone. At the same time, could you work fewer extra hours without reducing your schedule? Could you set better boundaries at work to work closer to 40 hours/week (or however many hours are standard for your job)?
- Find a Job You Enjoy – If you can find a job you enjoy that’s less stressful, you’ll hopefully be able to prevent burnout and reduce your spending triggers. This could allow you to spend significantly less money on convenience and escape. You’ll also need to spend a lot less time detoxing from work each day.
Taking a Pay Cut Increased My True Hourly Wage and Dramatically Improved My Life
When I originally took a 50% pay cut to work part-time, I didn’t realize the extent of the positive impact that it would have on my life. I knew that it would cut down on commuting costs and likely stress. I had no idea I’d also spend so much less on things like take-out and random purchases that made my life feel more bearable.
Once you get to the point where you make enough to live on and save, you can begin to focus on increasing your true hourly rate beyond increasing your salary. You can cut costs associated with working and decrease the time you spend doing work-related things.
When you do this, it can free up your time to focus on things that you enjoy and find meaningful.
I now realize that I care much more about having a better quality of life than having a high salary to feed my ego. Now, I get to spend more of my time doing things I enjoy and value.
What have you done to increase your True Hourly Wage?
This is a fascinating post!
I think that working many hours at a lower wage to become irreplaceable not only gives you a high salary whilst young but a lot of leverage to go part time on a higher hourly wage as your company needs you.
Definitely how is I’d like to do things!
I totally agree. I definitely needed to work a lot more hours, in the beginning, to work up to where I am now. I do think people need to focus on increasing their income first, and then they can add in these other ways.
By the time I factored in childcare, commute time, and extra hours worked, I definitely had a low true hourly wage when I worked FT salary.
Childcare definitely plays a huge role in this. Although we only have one little one and are lucky to have family involved in childcare, we have friends who have 2 or 3 kids. At that point working and figuring out your true hourly wage may turn out to be negative.
There are other non-monetary benefits to working. If you have a job you love with a good social network that can make a big difference.
Okay – time to go calculate my true hourly wage.
This is so true! I actually heard a story (that I think I want to feature as a Slow FI interview) of someone who decided to keep working, even though that would slow their path to FI. Ultimately, it’s a nuanced decision for every person, and people need to do what is best for them. I definitely don’t advocate that people stop working if it’s something they enjoy and they want to build up their career long-term.
Thanks for your thoughts!
The problem with having a really high income is that whenever I do these calculations, the true hourly wage suggests that I should be spending more. Better to hide it from myself.
Interesting. I guess this is a really good problem for you to have. Whatever works for you. 🙂
If you really want to talk about true hourly wage, then you’ll also need to factor in benefits earned from working full time and not just the hidden costs. You’ll most likely lose out on health insurance benefits when you go part time so that should be considered in your calculations.
This is a really good point. I did not include health benefits in the calculation. For me, that is okay because I’m married and I am able to be on my husband’s health insurance, but for people without that option, it would definitely be a consideration.
This also gives me the idea that we should include 401K match as well. Someday I will update this post and include all of these things.
Thank you for sharing the idea,