Wallet Warlock

Why We Can’t Escape The Hamster Wheel

In Your Money or Your Life, personal finance great Vicki Robin shared a powerful and provocative approach to evaluating one’s income which she refers to as calculating your “real” hourly wage.

This was an eye-opening approach to accounting for a huge range of invisible costs that traditional finance writers long ignored.

An example of a typical hourly wage calculation:

Nabassar makes a $65,000 annual salary as an accountant. If you go online to any simple wage conversion tool (or, gasp, attempt to perform the division yourself), you’ll see that this would be the rough equivalent of being paid $31.25/hour. This is a pre-tax estimate though, so let’s look further. 

If we assume that Nabassar files taxes as single in state with 7% income taxes and has 2 weeks of paid vacation time, we’d get a real wage estimate closer to $24.36/hour. That’s about as far as a traditional analysis takes the math.

An example of a real hourly wage calculation:

If we instead take Vicki Robin’s approach here, we can see that there are some important factors the traditional approach misses. Robin suggests we account for our time commuting and commuting costs, our work wardrobe requirements, our time getting ready and winding down from work, and other costs (both in our time and literal cash costs) that we only suffer as a direct result of working for a paycheck as part of our wage calculations as well.

Let’s now consider that Nabassar, like many other Americans, takes about 2.5 hours a week getting ready, 4.3 hours commuting, 2.5 hours destressing after work, and an average of about 8 hours on other work-related tasks like work travel, shopping for work clothes, and keeping current with certifications for his career as well. We’ll say it costs him an additional $100/week for transportation (gas, maintenance, insurance, depreciation) and other work costs like work clothes.

After accounting for those extra factors, how much is Nabassar making now?

Turns out, he’s really only making a little over $15/hour – less than half of the amount we got from our initial napkin math. But why is it really so hard for people in this kind of situation to get ahead and build real, long-term wealth? Let’s take an even deeper, darker dive.

A Wallet Warlock hourly wage calculation:

In Robin’s model, we’re only accounting for costs which are directly related to working. There’s clearly a logic in that, and it’s super helpful when evaluating prospective jobs and side gigs to see how rewarding they really are so that we can compare them side-by-side. But it isn’t the whole picture, either.

Take a look at the “Life Energy Examples” below from the real hourly wage calculator. According to this, it would cost Nabassar about 12 minutes of his time to afford a $3 cup of coffee, assuming we didn’t account for it already in the other numbers. If we think more carefully, though, I think we may see that it actually costs more. A lot more.

While we’re working our 9-5 jobs, we don’t live in an all-expenses-paid suite during the rest of our personal time. We all have, at a minimum, some kind of shelter, food, and clothing needs. The exact cost of these vary a lot from person to person, but for Nabassar and many like him, these things cost him about 50% of his net pay. Note that typical Americans spend even more than this on their so-called “fixed” costs if we also include transportation costs, but we’ve already accounted for that in the real hourly wage costs above.

So what? Why does this change things for Nabassar? Well, that means that the $15.26/hour it looked like he was making needs to go to pay for everything he needs AND wants, not just stuff he wants. He has no choice but to spend $7.63/hour he makes on his fixed costs, leaving only the other $7.63/hour for discretionary spending. This means $7.63/hour is Nabassar’s real, discretionary hourly wage. Any time he is evaluating a new thing he might want to spend money on, this is really the figure that matters. 

The real cost of coffee:

That $3 coffee that cost 12 minutes of overall work time? It actually costs closer to 24 minutes of time. The $25,000 wedding that looked before like it would take 7 months to afford? Now well over a year. It takes a long time to save up for anything when you only, really make $7/hour to buy it with. An interesting side note here is that your real, discretionary hourly wage is the most money you could possibly save from your net earnings, even if you never made any unnecessary purchases ever, unless you change your earnings or fixed costs. For Nabassar, that means that the most he can possibly save is about $14,560/year if he never buys anything for fun, which we all know is just not realistic.

And honestly, Nabassar is doing pretty well for himself, as his $65,000/year annual salary is already significantly better than the national average. We didn’t include any student loan debt or credit card debt payments in his numbers either, but if we did, it’d drive up the “fixed” costs, likely very significantly, and leave only an ever-dwindling slice of the pie for his wants and savings. For many Americans with these issues, their real, discretionary wage through this calculation will be $0/hour or less, which means that they will never get ahead unless they change the rules of the game they are playing entirely. It’s mathematically impossible to.

 With this in mind, it becomes a lot clearer why people have a hard time getting ahead with traditional money advice. We need to be honest with ourselves about the fact that only some of our money is ours to spend however we like, not all the money we earn. Plus, maybe we need to question the rules of the game as outlined entirely to ever really make progress. We’ll look deeper into that next time.