My first job after college paid $8 per hour — not good for an Ivy League alumni. That job was something to do while I tried to rediscover myself. I was lost and dispirited because I did not get accepted into a medical school. At that time, I was addicted to Magic: The Gathering. I justified spending $10-$15 almost everyday thinking I will earn that money in 1-2 hours the next day. With more financial maturity, I realize that justification was silly. Likewise, I think it is silly for someone who makes $30 an hour to think that a $500 iPhone can be his with only 17 hours of work.
Photo from Apple.com
The idea that you make $30 an hour because your wage is $30 an hour is completely flawed. First, there are taxes and living expenses to consider (do not include discretionary expenses):
As you can see, your true earning power is severely eroded by taxes and all the living expenses.
Second, the hours you work is more than the hours you spend at work. For instance:
As you can see, a lot more of your time is spent for work than the typical 40 hours work week.
Therefore, if we take these factors into account the true earning power can be expressed as:
True Earning Power = (Monthly Income – Monthly Taxes and Necessity Expenses) / Time
For example: Joe makes $5,000 a month. His taxes and living expenses total $4,000 a month. He usually wake up at 6:30 AM to get ready for work, and return home around 6:30 PM each day; totaling about 12 hours per day, 60 hours per week, or approximately 260 hours per month. Using the equation above, Joe’s true earning power is only $3.85 per hour!
For Joe, that new iPhone is not 17 hours of work ($500 / $30), but more like 130 hours of work ($500 / $3.85) !
For my wife and I, our combined true earning power is about $6 per hour. So the fact that I spent $30 for a half hour massage last week is making me sick right about now.
There are 3 main strategies to improve your earning power:
I hope you enjoy this post, and please share your thought.