To understand your true net pay, you have to factor in all the expenses related to your job. This is your cost of working. To illustrate this cost, let’s look at two hypothetical examples.
Hypothetical Example #1: Allison’s Extra Cost of Working
Allison needs nice clothes for work—not tailored suits, necessarily, but “business casual” attire like silk shirts, pencil skirts, and heels. These aren’t clothes she would buy if she didn’t have this job. She buys a new item for her work wardrobe once a month, at the cost of about $100. She spends $1,200 a year on work clothes. This also amounts to around three hours each month, or 36 hours a year, shopping for work clothes. Allison also shakes hands with clients, so her nails need to look professional. She gets manicures twice a month, at the cost of $25 per manicure. She wouldn’t normally do this if she wasn’t working. She spends $600 per year on this, and it takes her an additional three hours per month or another 36 hours per year. She also drives 25 minutes to and from work each day, or 4.16 hours a week. That’s 208 hours per year, assuming a two-week vacation. She also spends $25 per week, or $1,250 a year, on fuel directly related to her commuting costs. The wear and tear on her car costs her an additional $400 a year. Allison buys more convenience foods because she’s working. She spends an extra $20 per week on groceries, as compared to what she’d spend if she wasn’t working and had the time to cook from scratch. That’s another $1,000 per year. She’s in a hurry in the mornings. Normally she tries to brew coffee at home, but she’s usually running late once a week and buys a $3 coffee. That’s another $150 a year. Her two children are in the third and fourth grades. They go to after-school programs from 3 p.m. until 6 p.m., when Allison comes home from work. The kids enjoy the after-school programs, and they would want to participate in the programs regardless of whether Allison is working, so that cost isn’t a factor. In the summers, however, Allison needs to put the two kids in a summertime day camp. This costs $1,500 per child for the summer, or $3,000 in total. All in all, Allison’s cost of working is $7,600 a year. She also spends an additional 280 hours of commuting and buying business clothes.
Determining Allison’s Net Hourly Rate
She earns $55,000 per year plus a 3% retirement match, which is worth $1,650. Her company-sponsored health insurance would cost $250 per month on the open market, so that’s worth $3,000 a year. This brings her total compensation to $59,650 ($55,000 + $1,650 + $3,000). Subtract Allison’s $7,600 in work-related expenses, and her “net” pay is $52,050. She works 40-hour weeks, 50 weeks a year, plus an additional 280 hours a year commuting and buying business clothes, for a total of 2,280 hours a year. This means her “net hourly rate” is $22.82 per hour ($52,050 / 2,280).
Hypothetical Example #2: Bob’s Extra Cost of Working
Bob needs to wear suits, belts, and dress shoes to work. Each suit costs him $300. He owns about four suits, and he replaces one every year as they get worn out or become ill-fitting. He also buys roughly six dress shirts, two belts, several pair of socks, one pair of shoes, and two new ties each year, for an additional yearly total of $400. He spends 10 hours and $700 each year on business attire. He also needs to get his suits dry-cleaned. This costs an additional $40 a month, or $480 a year. He spends 30 minutes every month (six hours a year) dropping off and picking up the dry cleaning. He is expected to show up in a spotless car when he drives to meet with clients, so he gets his vehicle washed weekly (on top of regular deep cleans a few times a year). If he wasn’t working, he’d only do the deep cleans. The weekly car wash costs $5, for a yearly total of $250, and takes 15 minutes. He also has a 45-minute commute in each direction. Assuming a two-week vacation, he spends about 388 hours a year commuting and cleaning the car. He also spends $800 on vehicle wear and tear, and $2,500 on gasoline per year. Lastly, Bob sometimes grabs lunch from a local deli when he forgets to bring lunch from home. He does this twice a week, at $10 a lunch, for a total of $1,000 per year. In total, Bob’s cost of working is $5,730 per year.
Determining Bob’s Net Hourly Rate
He makes the same rate as Allison—$55,000 a year with a 3% retirement match and company health insurance that would cost $250 a month if he bought his own plan. That’s a total compensation package of $59,650. His “net” pay, though, is $53,920. He also spends 404 hours a year in commuting, dropping off dry cleaning, and buying business clothes. Assuming he also works a 40-hour week, his hourly rate is $22.42. If he works a 45-hour week, his hourly rate is $20.31. And if he works 50 hours a week, his rate is $18.56 an hour.
Budget for Working Costs
Always calculate your cost of working, especially when you’re considering a job offer. You need the most accurate picture possible for your budget. Of course, you can always look for ways to trim your working costs. You can vow to bring lunch to work every day. The lattes can go. You might find cheaper business clothes. But some costs, like commuting expenses and childcare, won’t subside. You might even choose to deduct these costs from your income when you create your budget. Either way, knowing your cost of working will help you better plan your finances.
