Increase Your Net Hourly Pay by Working Less

How much is your time worth? There are many ways to answer this question; some based on your current hourly pay, others based on how much money you could earn on the side. Regardless of the eventual answer, it is clear that time is an important asset–arguably the most important asset–so you should make sure you’re getting a good deal when selling your time.

Although many people focus on increasing their annual income (perhaps by working overtime or picking up side jobs), my position is that, when trading time for money, you should strive to maximize your pay rate, because the more you make per hour, the fewer the number of hours you require to cover your expenses.

The good news is that, in countries like the United States that have progressive income taxes, it is possible to increase your net hourly pay rate by simply working fewer hours per year. The rest of this article explores this unusual (not to be confused with “alternative”) fact.

Maximizing total annual income

Before digging into the financial benefits of part-time work, let’s explore when maximizing total annual income (not income per hour) makes sense.

If you work at a job where you are paid per hour, it is often easy to take on extra hours (overtime) to earn additional money. Similarly, if you can earn money on the side (e.g. shooting family photos), the path to a higher income is clear: do more work. On the other hand, if you are in a cushy salaried job, working more hours is generally a bad idea. Even if you get a performance-based bonus, my personal experience is that working additional hours in hopes of boosting your bonus is unrealistic because bonus payouts are usually limited to a tight range and you are better off prioritizing/optimizing the hours you already spend in the office instead of just staying late.

Assuming the option of earning more is available and you are channeling additional earnings into investments (instead of diversions to help you recover from all that excess work), those potential extra dollars are enticing. Once you have a positive savings rate, each additional dollar you earn bumps up that savings rate slightly, thereby decreasing the total amount of time you need to work in your career.

But what is the real goal of saving? Upgrading houses, cars, and clothes may be correlated with improved satisfaction with houses, cars, and clothes, but these upgrades are counterintuitively not linked to an increase in satisfaction with life in general.

This indicates that the goal of saving is to leverage those savings to later buy freedom–in other words: to buy more time. In turn, the decision boils down to one clear trade-off: do you want more time now or more time later? Mark Twain is quoted as saying “Life would be infinitely happier if we could only be born at the age of eighty and gradually approach eighteen.”

Given the logic above and clear guidance from an actual old person, my conclusion is that (within reason) it is a better choice to prioritize freedom now rather than later.

Maximizing rate of pay

Let’s assume you agree with the irrefutable logic above and you’ve decided you want to maximize your hourly rate of pay. What should you do?

One option is to find a higher paying job. Another is to ask for a raise. A more extreme option is to retrain in a different, more in-demand field with commensurately higher pay.

While all of these options should be considered, they share one clear flaw: they are a lot of work. If you are sufficiently lazy and not interested in updating your resume or constructing an argument for why you deserve more money, is there still any hope?

Why yes, there is. (Normally, this is where someone asks you to buy his or her time-tested system for earning tens of thousands of dollars per month at home–unlike those offers, my following argument is provable with grade school math.)

The simple solution is to brush up on how progressive income taxation works and realize that less work implies less tax, leaving you with a higher net pay rate, per hour worked.

As an example, consider Joe Full-Time, a fancy, established, salaried professional residing in an income tax-free state, earning a pre-tax salary of $100,000 per year. Joe works 1,800 hours per year (excluding vacation and holidays), maxes out his Health Savings Account and 401k (adding a 3% match), and spends $30,000 per year. Between payroll taxes (7.65%) and income taxes (estimated using TaxCaster), Joe pays $18,118 in taxes (hitting a marginal federal income tax rate of 25%), resulting in a total net pay of $84,882 per year, or $46.54 per hour.

Joe’s friend Part-Time Paul was formerly in the exact same situation, except that he recently started reading this blog and decided to downshift to only 3 days per week. Paul works 1,096 hours per year, similarly maxes out his tax-advantaged accounts, and spends the same $30,000 per year. Between payroll taxes and income taxes, Paul only pays $6,330 in taxes (settling comfortably within the more favorable 15% marginal tax bracket). Paul earns a much lower total net pay of $55,470, but a noticeably higher net rate of $50.68 per hour. In a state with an income tax, the difference would be even more pronounced.

Thanks to progressive taxation, Part-Time Paul has essentially scored a 9% raise, just for taking 4-day weekends every single week. The bottom line is that the government truly cares about your wellbeing and rewards part-time workers and downshifters accordingly (or something like that).

Obviously, this is a contrived example that covers well-paid salary workers. Other factors (e.g. overtime pay) change the calculations. If you are considering going part-time, sit down with a calculator and do the math. The result may surprise you. If it doesn’t, at least you can stop reading this article.

But part-timers have a much lower savings rate!

In the example above, Joe is actually squirreling away over twice as much per year as compared to Paul. Each year, Joe adds roughly $55,000 to investments, whereas Paul adds closer to $25,000.

Does this mean that Paul will have to slog through twice as many working years as Joe?

The answer is no. If both fellows have set a goal of earning 25 times their annual spending (a noble and practical goal), it will take Joe about 11 years, working full-time. Let’s say Paul worked full-time for the first 5 years to establish his career and then dropped to 60% time. Paul ends up working a total of about 15 years to reach the same goal, but 10 of those years are at 60% time, so the total (in terms of hours worked) is equivalent to 11 years of full-time work. Except that Paul’s final 10 years were likely infinitely more relaxed and enjoyable.

Given the difference in net hourly pay, it shouldn’t be too surprising that the different in total number of hours worked over their careers ends up being a wash. Instead, the more important conclusion (in my opinion) is that Paul was able to enjoy more freedom earlier in his life while still setting himself up for very early financial success.

What do you think?


6 thoughts on “Increase Your Net Hourly Pay by Working Less

  1. When I was making a salary of $100k, I figured that my true hourly rate was $20, as calculated per Your Money or Your Life. That’s when I realized that I would rather just work for $20/hour and work only 15-20 hours. I do make more than $20/hour, but I don’t work more than 2-3 days per week, and absolutely would go down that far on the pay scale if it meant an exciting opportunity… again though, only part time. 🙂

    Liked by 1 person

    1. That’s awesome to hear that you were able to make part-time work a reality! The world would truly be a better place if more people did that 🙂

      Out of curiosity, in your anecdote, how did you end up only keeping $20/hour out of a $100k/year salary? YMOYL’s method is absolutely the logical one, but I can’t see taxes or even commuting costs eating up quite that much!


      1. The low hourly wage comes with how many hours I was working total… in the office, evenings and weekends working at home, commuting, getting ready, preparing lunches, etc…. Also, I knew I was going to get rid of my car after I left (and I did!), and when not working, I walked and biked everywhere, so almost all car costs and time spent maintaining was just for my job.


  2. I did this big time my last couple years of salaried employment. The position I was in helped as I traveled a lot and generally set up my own schedule. In my previous position I was getting like $75k per year base salary and working 45-50 hour weeks. In my last year of work I was making something like $95k base salary but working only about 30-35 hours per week. Pretty sweet deal. Doing a quick version of the math, my hourly rate was around 80% higher!! HOLY SMOKES!

    Liked by 1 person

    1. And I’m sure that lower time commitment for work left you with quite a bit of time for pursuits outside of work. Like converting a van 🙂


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s