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How much do you REALLY make?

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The ability to manage and master your finances is simply based on two factors: what you bring in and what goes out.  Income versus expenses.  Earning versus spending.  Though this may seem like an oversimplification, this is essentially what personal finance boils down to.  If you spend more than you earn, this puts you in debt and leads to a precarious financial situation.  This is the unfortunate truth for many in America today, as the allure of easy credit and excessive consumption keeps many in debt.  On the other hand, earning more than you spend puts you in a position to save and invest, and saving enough will help you weather almost any financial storm or life changing event that comes your way.

Getting that first job after college and seeing all those numbers that represent your yearly salary can be exciting at first.  It’s usually more money than you have ever seen before, so it can be an exhilarating time.  But appearances can be deceiving.  Though that nice big round number may look nice, it’s not all going to hit your checking account.  If you’re not careful, you might not even get half of it.  To make things simple for the purpose of this post, we will not be considering the effect that taxes have on your take home income.  For the purpose of your life, you should not do that.

There are many associated, and often times hidden, costs for any job.  They will of course vary depending on the person’s situation, but some associated costs jump right out at us.  Knowing what these costs are will help you determine your real hourly wage, that is, what you make per hour after all of the associated work expenses.  The fact is, if you were not working at that particular job, you would not have to spend money on all of the associated expenses.  The biggest factor people usually associate with jobs is the commute.  Whether it is driving or taking public transportation, there is going to be some cost of commuting to your job, unless you work from home of course.  Most of us would just calculate how much we spend for gas and be done with it.  But there are other hidden costs to commuting such as wear and tear on the car which can lead to increased trips to the shop, money spent on tolls, and increased frequency of oil changes due to driving every day.

Another big factor is money spent on food.  This is not just money spent on lunches, which can be pretty high in some cases, but also includes the daily coffee we get from the shop on the way to work, “rewarding” ourselves with a treat after a stressful day, and money spent on take out when we do not have time or are too tired to prepare dinner at home.  All of these are associated costs relating to food.  There are many other costs which would take up too much space here such as the need to take vacations from a stressful job, hiring outside help such as yard workers, maids, and tutors, money spent on entertainment to unwind from the stresses at work and the list can go on.  Let us go through a simplified example to see how much having a certain job can actually cost you.

Let us say you have a friend who makes 20 dollars per hour.  They tell you they seem to be struggling to make ends meet but they are not sure why.  You ask him how much he makes per week.  He simply multiplies 20 dollars an hour by 40 hours per week to get 800 dollars per week.  But knowing what we know about job associated costs, we go deeper and find out what he is actually making.  We calculate that with money paid for gas, tolls, and wear and tear on his car, he is spending an average of 100 dollars per week on commuting related expenses.  We then move to food and find out that with his daily latte, occasional lunches and eating out with co-workers, he is spending an average of 50 dollars a week on food directly related to his job.  We also find out that he has a habit of seeing a movie with a co-worker after a long day of work and rents movies weekly to decompress after work.  This comes out to 30 dollars per week.

His job also has a dress code, and sometimes he has to wear a suit to meetings.  He is normally a T-shirt and jeans kind of guy so he is spending an average of 20 dollars per week on work related clothes.  He also takes a yearly vacation just to get away from it all which averages out to 40 dollars a week over the year.  Last but not least, he also hires a cleaning service because he has no time to thoroughly clean his apartment.  This comes to about 25 dollars a week.  There are other associated costs but these are the ones that stick out so let us work with these.  Our friend said that he makes 800 dollars per week.  After applying just these associated costs we went over, we find out that he is actually making $535 per week after work related expenses.   This means after associated costs, he is actually making a little over $13 an hour instead of $20!

Though this example had simplified numbers and categories, it shows that job related expenses can really take a bite out of your bottom line.  Now most importantly, what can we do with this information?  Right off the bat it is easy to see how we can use this when comparing multiple job offers or contemplating getting a new job.  If we see our real hourly wage, we can more easily find which job will be best for us.  We can also use this information to examine our destructive money habits and try our best to change them.  In our example, if our friend just made coffee at home and stopped going to the theaters to watch movies after work, that could easily save 30 dollars or so a week.  Making little positive changes here and there can really add up and help to improve our situation.  Visually seeing what steps we can take to improve our financial situation is very empowering, and this exercise can provide that.

Finally, this exercise can show us how important it is to spend our money on the things that matter most.  If we know that our real hourly wage is 12 dollars an hour instead of 20, maybe we will think twice before we drop down 20 bucks for a movie ticket and popcorn for 2 hours of fun or 40 bucks for a video game we will only play once in a while.  Instead of spending our money on frivolous things, maybe we can save it and spend some time exercising, learning a new skill or just spending time with our family.

Successfully graduating with a bachelor’s or any advanced degree takes a lot of work.  It is vital to find the job that suits  you rather than going for the first big salary you see and later realizing you’re not making as much as you thought.

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Diamonds in the Rough Roundup 8/15/14

NFL preaseason is underway.  Which means real football is right around the corner.  With all the unrest going on around the country and the world, it’s almost nice to know that football is near.  Is it a distraction or maybe an opportunity for togetherness and peace?  I guess it all depends on how you look at it.

-Are You Just Treading Water? by Dividend Mantra:  Excellent post talking about the dismal savings rate in this country and just why people seem ok with “getting by”.  It really pays to sit down every few months or so and evaluate your current expenses to see where you can save.

-3 Common Money Worries by Cat Alford:  Everyone worries about money at some point.  Be it retirement, education, healthcare or housing, there is almost always something to worry about.  The key is not to let the worries take you over but let it spur you to take positive action.

-If You Produce Nothing How Can You Expect to Make any Money? by Financial Samurai:  Most people like to whine and complain.  That’s why most people don’t become successful  You need to work hard and create something of value to be a lasting success.

-Do You Ask for the Order? by BrokeMillenial:  Great post on the importance of asking what you want.  It can produce amazing results.

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