The Dark Side Of That Terrific Paycheck

This is a contribution from Syed of The Broke Professional! He runs an up and coming personal finance site for working professionals. On top of that, he’s a practicing doctor. Thanks for the article, Syed!

Personal Finance Is Simple, Right?

The ability to manage and master your finances is based on two factors: what you bring in and what goes out – income versus expenses. Though this may seem like an oversimplification, everything financial boils down to this equation. 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 saving enough will help you weather almost any financial storm or life-changing event that comes your way.

Your Paycheck’s Hidden Costs

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 exciting time. But appearances can be deceiving. Though that nice big round number may look nice, you’re not going to get all of it. If you’re not careful, you might not even get half of it.

There are many associated, and often times hidden, costs for any job. Knowing what these costs are will help you determine your real hourly wage – what you make per hour after all of the associated work expenses are accounted.

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. 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 for some is money spent on food. From eating out to that daily coffee we get from Starbucks on the way to work, “rewarding” ourselves with a treat after a stressful day, and money spent on take-out when we are too tired to prepare dinner at home. Work can hurt your budget by leaving you with little time to think, prepare, and make wholesome spending choices.

The list can be endless: hiring outside help such as yard workers, maids, tutors, and money spent on entertainment to de-stress from work. Let us go through a simplified example to see how much having a certain job can actually cost you, and what your real paycheck ends up being.

Analyzing Paychecks

Let’s say you have a friend who makes $20/hour. They’re struggling to make ends meet, but 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 a week on food. Then, we 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 de-compress after work. This comes out to 30 dollars per week.

His job also has a dress code of a shirt and tie, and sometimes he has to wear a suit to meetings. This newer wardrobe can cost a couple hundred dollars, and require purchases further down the road.

He also takes a yearly vacation just to get away from it all, which averages out to $40 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 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 per week. After applying just these associated costs we went over, we find out that he is making 480 dollars per week. This means after associated costs, he is actually making 12 dollars an hour in possible savings!

What Does It All Mean?

Though this example had simplified numbers and categories, it shows that job-related expenses can really take a bite out of your bottom line. By looking at the real hourly wage, you can better evaluate the consequences on your budget and well-being. We can also use this information to examine our destructive money habits and try our best to change them.

In this example, if our friend made coffee at home and stopped going to the theaters after work, he could easily save $30 a week. Making little, positive changes here and there can really add up and help to improve our situation.

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 money on frivolous things, maybe we can save it, spend some time exercising, learn a new skill, and spend time with 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 and your life, rather than going for the first big salary you see and realizing you’re not making as much as you thought.