Hourly rate thinking

How to use your hourly rate to make financial decisions

written by oz chen

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How much do you make per hour?

This is a simple question, but once you dive deeper things…get interesting.

The hourly wage is a fixture of everyday economics. The minimum wage, while imperfect, establishes the floor for survival. It’s easy to take for granted—the minimum wage was established less than 100 years ago when the Fair Labor Standards Act were enacted in 1938.

I’m interested in the hourly rate because it serves as a fundamental unit of accounting for your financial life.

You can use your hourly rate to make decisions about money, whether it’s how much to spend, save or invest.

Let’s say you’re feeling unsure about a new purchase.
It’s $2000.
If you make $50/hour, then it would take you 40 hours—a working week—to make that amount back.

Aside: mental math trick to convert between hourly rate and annual salary
For a $50,000 salary, divide 50 by 2 to roughly get $25/hour.
Or multiply your hourly rate by 2. If you make $25 an hour, then you make about (25 x 2) = $50,000 per year.

This calculation is based on: 40 hour work week x 52 weeks = 2080 hours. We just multiply or divide by 2 (a proxy for 2000) to get a quick estimate.

I was blown away the first time I looked at my spending from the point of view of my hourly rate.
It gave me a way to respect my money—and honestly, my time.
Beyond fixed costs like rent, it was hard to gauge whether something was affordable or not.

But comparing a cost to how much time and labor it took to earn that money, and how much more time I’d have to commit to replace that money if spent…it just made me finances feel more real.

Pet theory: thinking in terms of your hourly wage activates ownership bias.

Ownership bias happens when we value things more when it comes with a sense of ownership, such that we become increasingly reluctant to exchange what we feel is ours. (The “Ikea effect” is the classic example, in which people value furniture more than it costs when they take their own time to assemble it.)

When I accounted for the time I’ve spent to the make money, it makes me value that money more.
Is this ebike worth a week of work?
Is that house worth working a decade longer?

Time really is the precious resource we can’t replace.

But we’re not done yet. We can’t just use the raw hourly rate.

It’s more accurate to use your after tax hourly rate.

The average effective tax rate is about 25%.

So $50/hour is more like $37.50/hour.

That’s why it’s called gross pay; it’s gross that it’s not your actual pay.

That should adjust your expectations when you count your purchases in terms of hours worked. That $2000 purchase is no longer worth 40 hours of work, it’s worth $2000 / $37.50 = 53 hours of work…or 13 more hours than we originally accounted for.

In this way, hourly wage thinking could be used to combat unconscious consumerism.

  • Before: “I make good money, so paying $700/month for a BMW is no problem”
  • After: “I make $100K but that comes out to be $37.50/hour. This costs me 18 hours of work, or about 11% of my monthly paycheck just to drive this car. That doesn’t include gas, maintenance, insurance…”

The lens of time is a psychological tool that can help slow down impulse purchases and unnecessary spending.

It sucks to say no to things you want. But hourly wage thinking can also help you say no to things you don’t want.

What’s worth your hourly rate?

Your hourly wage can help you decide what’s not worth your time.

I once tried to dig out plants from my front yard. When I kept failing to hit root after an hour of sweat and frustration, I realized: holy shit this agave plant is huge.

Second thought: this is above my pay grade.

A neighbor saw me struggling and offered to help out. I asked him what would be fair for his time. “I don’t know, $20 and can I keep the agave plants?”

That’s less than half my hourly rate. Do it.

Hourly rate thinking helps size problems:

  • This is a $50 problem. I can make this back quickly in an hour of work. Hire it away.
  • I’ve been stressing for a week over what is really a 2 hour problem.
  • Instead of running around town in errand hell, maybe paying someone $30 on an app is well worth my time.

Caveat: this notion could be easily abused. We don’t earn an hourly rate all the time. If you work 40 hours a week, that leaves 128 nonworking hours in the week. Using the hourly rate to justify things to buy makes sense…up to the number of available hours of work.

This idea is called the utilization rate in consulting, legal and industries that charge billable hours.

Hypothetically, it’ll sound impressive if I earned $1000/hour. But if my opportunity to earn this rate comes only once a month…that’s far different than earning that much every hour in a month, which would total $720,000. This would also be physically impossible.

BUT…just because someone will pay your hourly rate doesn’t mean you have the capacity or interest to do it.

Your aspirational hourly rate

Not every hour is the same, and not all time is equal.

Pay my rate to pull out weeds? Pass.
Pay my rate to have conversations about money? Oh hell yeah.
You can’t pay me any amount to inhale toxins or go without sleep. Duh.

Internally, I can value my time at higher rates that support my goals:

  • Saying no to lucrative, short term opportunities that don’t align with my vision.
  • Carving out time to deepen hobbies and connections, because the intangible value is so great.
  • Long-term projects like starting a business or creating content could have a huge eventual payoff.

If you valued your time at 10x your hourly rate, what would that look like?

All of this points to spending time on higher value activities, whatever high value means to you.

And you have a lot more space for higher value activities when you don’t rely on an hourly rate.

Investing untethers you from your hourly rate

Warren Buffett said, with ominous flair…if you can’t figure out how to make money while you sleep, then you’ll be working until the day you die.

The solution: invest in assets that have the potential to grow in value and/or provide income.

This is the entire premise behind the FIRE movement: convert your dollars earned from labor into investments that don’t require ongoing labor.

Many people who are financially free don’t “earn” an hourly wage, especially if they’re retired. They live off their assets. Imagine, if a $1 million portfolio just fluctuated 10%, you’ve now “made” $100,000 in 1 day, or “worked” 2000 hours at $50/hour. (Of course the opposite scenario can happen, because investing is a fluid game.)

A lot of FIRE people are ambitious, driven people—which is what enables them to consider early retirement in the first place. One of the biggest psychological forces facing financial freedom seekers is to give up opportunities that want to pay them a lot of money, when they no longer need the money and want a new lifestyle.

Just because you can make more money, doesn’t mean you should.

And isn’t that the goal? To be in a place where one can untether from the hourly rate and become work optional? At least that’s mine. To adopt the mindset that I “make” $0/hour, but I value my time at $500/hour. I only do things I want to do.

IF this has sparked any inspiration, then do yourself a favor and read my free starter guide to investing and considering signing up for my coaching program HiFi Wealth.

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