One thing I’ve noticed about people that have reached FI is that many of them continue to ‘work’ to some degree.
If you’re smart enough to get yourself in a position to reach FI or early retirement then you’ve most likely got a brain that needs more stimulation than daytime TV can provide.
It strikes me that most of us FI seekers are not looking for total retirement but some sort of compromise where we’re working on our terms, be it working from home, doing charitable work or monetizing a hobby we have. The key to defining this seems to be finding the right balance between giving up our time, earning money and being intellectually stimulated. The first two of these factors is usually the focus of most peoples efforts to reach FI.
I’ve got two good friends both with very well paid jobs. One works in recruitment for a hip tech company while the other is a slave to the Finance industry (a bit like me but a lot worse). By my reckoning they both earn around the same money however Mr Finance’s average day in the office is around 12 hours (often a lot longer) while Mr Tech rarely does more than a 9-5pm and works from home two days a week.
After meeting up with them both recently I started thinking more about how much I was paid per hour. All to often we focus on the headline ‘earnings’ figure and ignore the time we have to sacrifice to get our hands on the filthy lucre.
I recently sat down and worked out what my real earnings per hour are. To be honest the result was quite a shock.
How I calculated My Hourly Wage
Your hourly rate can be calculated using a pretty simple formula:
Hourly Rate = Money Earned / Hours taken
…meaning there are two areas to consider.
Net/Gross Earnings: Unless you’re a large multinational internet company, or have friends in Panama, then you’ll almost certainly have to pay some tax on your hard earned income. I’ve discussed before how mad our marginal tax rates are in this country. The earnings I use for the calculation are net of tax. I do this by picking up the net income figure from my PD11D tax statement.
Bonuses: I’m lucky in that I tend to receive an annual discretionary bonus. I took the average from the last 3 years into account, again net of any tax paid and adjusted the above figure form my P11D erring on the side of conservatism.
Commuting costs: I deduct the cost of my rail pass (an exorbitant amount) from my net earnings as this is a material costs for me.
Nursery fees. If you have darling sproglets that attend a nursery while you’re in the office then you should also deduct these fees from your net earnings.
Pensions. I also included net pension contributions in my ‘earnings’ part of the equation.
If you wanted to get bogged down in the detail you could also exclude any other work associated costs such as additional food costs, spending on work clothes and any other associated costs you incur as a result of your employment. For a frugal guy like me these tend to be pretty controlled so I didn’t exclude them to keep things simple.
Assuming you’re salaried or paid per project, how many hours you work will of course impact your real hourly earnings. As a start point I took my average hours in the office.
Commuting time: I include all commuting time into my calculations, apart from the cycle to/from the train station as this is optional and I view it as leisure time.
Lunch/Breaks: In my line of work lunches are usually spent at the desk eating while working so I don’t take any time off for breaks.
I’ll be a little honest, the number that plopped out the bottom wasn’t quite as big as I expected. That said it’s hardly surprising given I work reasonably long hours and have a long commute.
To help you get a rough sense of what your real hourly rate it below I’ve put together a table showing a wide range of gross salaries, take home pays (based on the 2016 tax year) and what those equate to as an hourly wage (net of income tax) for a range of working weeks. To calculate these rates I’ve kept things nice and simple and ignored all of the time/cost adjustments I mentioned above.
I simple took the gross salary, deducted income tax and I’ve assumed a 48 working week year in order to calculate the hourly rates.
What is very interesting when looking at the above table is that it becomes immediately clear that the number of hours you work is just as important as your salary. For example someone earning £50k and working a sociable 35 hour week who live round the corner from work (i.e. no commute) is picking up around £21.60 per hour. That hot shot city analyst you know earning £120k only pulls in the same (well, £21.75) hourly rate by the time they’ve done a 70 hour week including the commute.
If you work in an industry like me (finance) where there is a culture of long hours and seemingly big salaries then you might be surprised how your hourly earnings may not be quite as spectacular as you thought. All of a sudden after looking at these tables I began questioning how I could improve the number that fell out of the bottom. Below are a few ideas…
Work from home. I’ve recently began working from home on a regular basis, one day a week. Doing so saves me valuable commuting time that I can divert to more pleasurable activities as well as increase the real hourly earnings.
Work smarter. Since becoming a father my time has become even more precious. I’ve been making a concerted effort to work harder and faster but for less time. I reckon I work between 1-1.5hrs a day less than I did about 1-2 years ago but manage to maintain at least the same level of productivity, if not more. Here’s a couple of ways I’ve done this:
- Only ever touch an email once. Either delete it or reply straight away, never waste time reading it twice.
- Ignore the peer pressure to work long hours just for the sake of it. Be open with your colleagues about what you’re trying to do.
- Ignore the crap. I receive around 500 work emails a day. If i’m not careful I spend the whole day sorting through them and achieving nothing. Be ruthless and delete the crap. If it’s that important they’ll pick up the phone or come to your desk.
- Block out chunks of your diary in order to ring fence uninterrupted work time
Push for That Promotion. I’m firmly of the opinion that if you’re in it you might as well win it. At points in the past I’ve been content with my generous remuneration and happy enough to drift along taking the wage an not getting too stressed or caught up in the politics of climbing greasy poles. This strategy served me pretty well over the years and it hasn’t really impacted my career progression.
More recently however I’ve opted to be more aggressive in my pursuit of gains from my employer. As mentioned recently I’ve managed to negotiate working from home one day a week. In addition I’m pushing hard for promotion, and more specifically the pay rise that will come with it. The way I see it is if I’m playing the game, I may as well get a better seat at the table.
Of course, the real satisfaction will come when I perform the same calculation in a few years time when I’m resting saefly under the money tree, working (probably) very little, if at all, and reaping an income from my investments that sustains the lifestyle I want to lead.