Most people don’t make well-informed decisions; they mean to, but they don’t. In general, people are much more likely to make decisions based on speculation, their feelings or a hunch, than to base decisions on hard data. Even well-meaning people who set out to be informed, can get bogged down by the sheer preponderance of information (and misinformation) they have to wade through.
Consequently, there is an opportunity to save a lot of money by simply being informed about the areas that are most financially impactful, such as buying real-estate, vehicle purchases and, of course, your career. When it comes to making employment decisions you have to know exactly where you’re at in order to make decisions that are financially sound.
Here are 5 steps to calculating your true earnings, in order to make employment decisions.
1. Calculating Total Compensation: Time Spent Working
When calculating your total employment package, the first step is to determine how much time you actually spend working. That seems obvious but the equation is more complex than it seems at first glace. Most employees earn paid time off (PTO), sick days, rotating and flex holidays and other perks, so a true calculation of your total compensation package should include a tally of the days you actually expect to work and omit ones where you’re paid but not working.
Let’s use an example of someone making $60,000 gross income per year.
|TIME OFF ITEM||HOURS||DAYS||WORK WEEKS|
|Paid Time Off ||40||5||1|
|Other Days Off||56||7||1.4|
52 – Total weeks per year
(4.4) – Total weeks per year not worked
$60,000 / [47.6 (weeks worked) * 40 (work hours per week)->
$60,000 / 1,904 =
$31.51 Per Hour – Adjusted for actual time working per year
2. Calculating Total Compensation: Retirement Benefits
If your employer matches your retirement contributions, your next step should be to calculate the monetary value of your retirement benefits. You could reduce your gross income by the contributions you make to earn this match, in order to reflect only the money you can spend now, but I don’t. I don’t think contributions should reduce income because I look at retirement investments as various allocations of income rather than expenses. I’m not losing money by contributing, (hopefully) I’m simply moving money around to earn more in the future. Taxes, however, feel more like expenses to me because their benefits are felt on a larger scale and even if I choose to get a refund, the amount I get back depends on so many other factors.
If your employer offers a Simple IRA they likely opt to match up to 3% of your pretax contributions dollar-for-dollar. You can calculate the value of a Simple IRA (or apply to other retirement vehicles) like this:
$60,000 * 0.03 = $1,800 in annual contributions withheld from pay
$1,800 * 2 (matching dollar-for-dollar) = $3,600 allocated to the Simple IRA
Total Value: $1,800 (Employer Matched Portion)
3. Calculating Total Compensation: Health Care Benefits
If you have ever had to pay for health insurance premiums out of pocket, you understand how valuable a fully covered healthcare plan at work can be. Even average healthcare plans are typically worth thousands of dollars per year to employees.
For example: Let’s say your healthcare premiums are 100% covered and you receive $100 monthly contributions to your HSA, plus matching of 50% of additional contributions, up to $600 per year…
$100 (per month) * 12 (months) = $1,200
50% (matching on up to $600 of contributions) = $300
$355 (cost of employer-paid premiums) * 12 (months) = $4,260
$13 (employer-paid eye care premium) * 12 (months) = $156
4. Calculating Total Compensation: Taxes & Other Factors
Accounting for tax, social security, and Medicare withholding is not complicated. The easiest way to get an estimate is to review your pay statements and note the average monthly withholding.
When combined with the calculations above you arrive at your net total compensation package:
$60,000 – [12 * (avg monthly tax withholding + social security + medicare)] + (annual benefits – benefit taxes) + reimbursements & all other earned income = total compensation.
|Health Care Benefits||$5,916|
5. Subjective Factors
In the long-term, job satisfaction is likely the most important factor to consider when calculating your true total compensation package. Though hard to quantify in monetary terms, it is often the intangible factors that prove most valuable to employees.
I proved this to myself during my first years in the professional market, as a tax liability consultant. After becoming an Enrolled Agent, I began representing clients with huge tax debts, before the IRS and state taxing authorities. Having 150 cases on your desk, and having to go war with tax collectors all day eventually became so stressful that I chose to apply to, and took, a much lower-paying job right across the street from my apartment. That ended up being one of my best career decisions I’ve made, as it eventually lead to a lot of interesting and fulfilling work, much less stress and more time with my family. And, the money that I seemingly lost in the change was soon replaced and has even increased beyond what I was previously earning as well.