How much do you REALLY make? - The Broke Professional

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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Comments

  1. I didn’t spend enough time looking at my cash flow when I first started my career. I didn’t let my credit card debt get out of control, but I did spend more than I needed to on unnecessary things.

    • Cash flow is definitely key when starting out. This is something that took me a while to get a handle on as well. Thanks for the comment.

  2. Great article! It’s so important to look at all the costs associated with your job. I learned the hard way at my first job out of college that I couldn’t afford to commute on my salary.

    • Yup making more money is not always the better solution if it drastically effects other areas of your life. An easy commute can save time and money while a longer commute wastes both. Thanks for the comment!

  3. Great post. I had a preconceived notion of how big my salary was (or was not!) ” Making 40 60, 80, 110 thousand a year can sound like so much money, but is it really? I think we get stuck on the idea that a certain salary is a lot but don’t adjust it for the passage of time/inflation/cost of living etc. When I was much younger I thought a salary of 40,000 was oodles of money. I hope this ramble makes sense…..

    • Makes perfect sense! A $100K salary for someone living in California is a lot different than a $100K salary for someone living in Mississippi. There are a lot of other factors to take into consideration and many people fail to realize that. Thanks for the comment.

  4. Kay@Green Money Stream says:

    This post does a great job of emphasizing how important it is to track spending and go through the exercise of calculating your true hourly wage. It can be enlightening!

    • It certainly can be enlightening. It really helps to know you’re true earnings after work expenses especially when comparing a new job offer with your current job.

  5. I just sat down and did this with my sister. She told me how much she makes but then we calculated wear and tear on her vehicle and the cost of gas (she drives 100 miles per day) and the number was ridiculous.

    • That’s a lotta miles! I’m not a big fan of commuting because it wastes time and money. I would recommend try keeping commuting to a minimum unless it’s really worth it. Thanks for the comment I’m a big fan of your site.

  6. Great post. I have always said that it isn’t what you earn but what you keep that matters. Regardless of where you live and the associated cost of living, what you have left after expenses to save and invest is what matters. Finding ways to trim lifestyle costs and banking the savings is the real measurement to use. I never made a 6 figure salary and was able to retire at age 51. You are absolutely right, your total income doesn’t tell the real story.
    Prost!

    • You’re exactly right it’s all about keeping your cash flow positive and putting your money to work. There are many doctors and other professionals that make big bucks but are teetering on the edge of financial ruin. If you make $500k a year and spend $500k a year, you’re really not getting ahead. Thanks for the comment.

  7. I think that some of these expenses are a bit far fetched and certainly optional (cleaning fee, daily latte, etc) but I do think that you need to look at the full picture instead of just a portion of it when thinking about your income vs. expenses .

    • Depending on where you live in the country, some of these expenses are actually pretty commonplace. My wife and I are actually one of the few people we know that DON’T have a maid. It’s crazy really they can cost you upwards of $150 a month just to clean stuff which would take you a few minutes every few days. A look at the full picture is definitely needed. Thanks for the comment.

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