Family Finances: How much do you value an hour?

You’ve got an hourly rate, whether you know it or not. And it can help you decide many, many things.

Photo by: Selbe <3

Is it worth the money to hire a cleaning service? Should I mail this or drive it over? Is it worth the hassle to list that side table on Craigslist? Should I DIY a frame or buy a new one? Dear readers, today I will present a concept that could help you answer these questions to the benefit of your pocketbook! Allow me to introduce my friend–the hourly rate.

The Difference Between an Hourly Rate and a Wage Rate

Ironically, your hourly rate is not what you are paid per hour if you are paid hourly. An hourly rate is more like a freelance rate. If you are a freelancer, or married to a freelancer like I am, you know what I mean. Here is an illustration of how the hourly rate is different from a wage rate.

My dad to my husband: What is your hourly rate?
My husband: $so and so
My dad: [multiplies said rate by 40 hours per week and by 52 weeks per year] [turns to me] Daaaaaamn girl, you done good.

No, no, friends–a freelance rate does not in any way equate to an hourly wage because it doesn’t account for the many, many hours a freelancer spends doing administrative tasks, answering emails, and schmoozing at cocktail parties. If you are paid hourly, you are paid for doing all of these work-related tasks. Also if you are paid hourly, you are typically provided with the tools to do your job and are expected to work a certain number of hours. And if you are lucky you get other benefits like paid time off and supplemented health insurance. In contrast, a freelance rate is like the Wild West of work. You provide your own tools, pay for your own benefits, and set your own hours.

An hourly rate is more like how you value an hour of your time OUTSIDE of your 9 to 5. And here’s the kicker–I’ll bet you already have an hourly rate. You just don’t know it yet!

How to Figure Your Hourly Rate

One way to think about your hourly rate is to give yourself an exercise. Let’s say I’ve got this little project going on this weekend. I could use an extra pair of hands. It will take you two hours, and I’ll pay you fifty bucks. Are you interested? If not, then your hourly rate is higher than $25. I really want help, so I offer you $200 for the two hours of Saturday morning work. If it is sounding more like a good deal to you, your hourly rate is somewhere between $25 and $100 per hour.

I’m about to disappoint the math geniuses out there with my pitiful excuse for an equation, but here goes. Your hourly rate is determined by some combination of:

  1. the rate you could command as a freelancer or contractor
  2. your wealth
  3. the amount of “free time” you have.

The first is pretty obvious: if you could make $100 freelancing for an hour, it is a no-brainer to pay your mechanic $40 per hour to fix your car so you can spend the time freelancing. Your wealth factors into this equation because the wealthier you are, the higher your hourly rate. If you are Beyoncé, probably you are willing to pay someone almost anything not to have to clean your own toilet. (This is why rich people have cooks and maids and chauffeurs and yard men and pool boys.) The amount of free time you have matters because the less you have, the more expensive it is. When my husband and I were young marrieds we would go together to the grocery store each Saturday morning and casually stroll the aisle. Now I have two kids, two businesses, and I’m in grad school. LOOK OUT in the grocery store, because I have thirteen point seven seconds to run through in the most efficient way possible. For me, a busier life resulted in an increase in how I value my time, or in other words, my hourly wage.

How an Hourly Rate Can Make You Wealthier

Knowing your hourly rate can be incredibly helpful when you are solving a “should I” problem that involves time and money. An hourly rate translates time into money so you can make an easy comparison. For example, should I hire a cleaning service? This is a real-life example for us. It takes either my husband or me three hours to clean our house. Our cleaning lady charges $20 per hour. I’m comparing $60 to three hours of our time, which isn’t necessarily an intuitive comparison. But, aha!, my husband is a freelancer whose hourly rate is more than $20 per hour. If he has the choice of spending three hours cleaning or three hours doing freelance work, suddenly the problem is easy, peasy. My hourly rate is also higher than $20 per hour, so it is worth it for us to subcontract out the house cleaning. In the long run, we will maximize our household wealth (and happiness) if my husband and I concentrate our time on the things we do well and contract out things like house cleaning, major home repairs, and car mechanic-ing.

Of course an hourly rate shouldn’t be the only tool you use to make money versus time decisions. If my husband really, really loved cleaning, his hourly rate would lose relevance when determining whether or not he should clean the house. He would do it, and love every second. We spend about a half hour each evening preparing dinner at home because we love healthy, home-cooked meals even though it would actually be “cheaper” for us to pick up burgers and fries from McDonalds. (Although that would make our four-year-old very happy.) You might value time with your family on Saturdays so much that no amount of cash would entice you to help with my hypothetical project. Or you might be completely clueless when it comes to home repair and will always, without a doubt, hire a professional.

The beauty of the hourly rate is that it is a flexible tool that can help you make decisions about how to use your time. It turns questions of time use into quick, back-of-the-envelope calculations. Knowing your hourly rate can help you avoid situations in which you feel like you are wasting your time and help you maximize wealth in the long run. Happy calculating!

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Amanda Gibson

Amanda Gibson used to teach folks about money at the Fed. Now she spends her days reading history books, raising kids, and thinking of ways to rule the world.

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