What Your Time Is Actually Worth: Your Effective Hourly Rate [VIDEO]

Forget your salary. Forget your hourly rate. Forget what it says on your invoice. None of those numbers tell you what your time is actually worth.

There's one number that does, and most people never calculate it. It's your effective hourly rate, also called your real hourly rate or true hourly wage. If you only pay attention to your income without factoring in your time, this is the metric that explains why you can do a lot of work and still feel like you're never getting ahead.

I've tracked mine for the last 11 years. Here's what it is, how to work it out, and why it changes the way you spend your time.

What is an effective hourly rate?

Your effective hourly rate is your total income divided by every hour you actually put in to earn it, including unpaid time like overtime and commuting. It's usually lower than your stated hourly rate, which is why it's a more honest measure of what your time is really worth.

That last part is where most people get it wrong. It's not just the hours on your timesheet. It includes overtime worked, your commute to and from your job, and for business owners, things like admin, bookkeeping, chasing deals and chasing invoices. All of it contributes to your real hourly rate.

Once you know your effective hourly rate, you won't look at how you spend your time the same way again. Every task, every opportunity, every quick favour gets measured against it.

How do you calculate your effective hourly rate?

It's simple. Your effective hourly rate is your total income divided by the total amount of time required to generate that income.

A worked example: how $25 an hour becomes $19

Say you earn $1,000 a week and you work a normal 40-hour week. On the surface, your effective hourly rate is $25 an hour.

Now factor in two hours of overtime plus an hour commute each way, five days a week. That's an extra 12 hours. So instead of dividing $1,000 by 40, you're dividing it by 52.

That comes to $19.23 an hour. Put another way, that's around $15,000 a year of time you are not being paid for.

The business owner version

For business owners there's more to think about. Say you generate $2,500 of revenue per week. You subtract your cost of goods, maybe that's $1,000, and your operating expenses, say $500, to arrive at your net profit. Then you divide that by your time.

Same concept. There are just more factors to consider as an owner.

Why it matters: four things knowing your rate changes

Understanding what my time is worth has helped me in four specific ways.

1. Opportunity cost

Say you value your time at $100 an hour and you have a project like building a website for your business. It's going to cost you $50 an hour to hire a developer. In that case it makes far more financial sense to have the developer build it so you can focus on higher-value work.

I went through this exact exercise about ten years ago when I started my business. I built my own website from scratch. It took ages and the quality spoke for itself. When we redid the MinorCo website recently, paying a developer was an obvious decision. Not only because my effective hourly rate is now higher, but because the opportunity cost means there are more important, higher-value things I can be doing. A developer also produces the website in less time and with a better outcome.

The same idea applies to salaried employees. If you take a job close to home that saves you two hours a day, even if it pays a little less, you have more time for friends, family or the things you enjoy.

2. Knowing when to say no

This is a big one. Your effective hourly rate tells you when to say no to an opportunity.

Sometimes a prospect approaches with red flags. They say they've got a quick project, should be easy, and here's my budget, this is what I can pay. We scope it, work out how long it will actually take to deliver what they're asking for, and realise it would have a lower effective hourly rate than our normal work. We can then go back and say we can't do it for that price, and here's a more realistic figure.

For a salaried employee it's similar. Maybe a colleague has left and you've picked up the slack. That might be fine for a week or two. But if your employer doesn't replace that person and you're just doing all the extra work, you may need to turn around and say you can't keep doing it, or you'll need to be paid more.

3. Spotting what to automate

Knowing your effective hourly rate helps you identify tasks you can automate.

We recently built a workflow for one of my clients in Zapier that saves their admin team about ten hours a week, because they're no longer doing manual data entry and calculations. It cost them about $3,000 to set up, and they'll see the payback in just 12 weeks. On top of that, their admin team now has more time to spend on higher-value tasks.

4. When to hire or delegate

Knowing your effective hourly rate helps you identify when to hire that next person or delegate work to someone on your team. This is something covered a lot in one of my favourite books, Buy Back Your Time by Dan Martell.

How do you track your effective hourly rate?

Personally, the best way I've found to do this is with a spreadsheet, and it's how I've tracked my real hourly rate for the last 11 years.

I have a profit and loss statement with my hours at the bottom. At the top are all sources of income, for example a weekly salary plus income from a side hustle. You then subtract any cost of goods and operating expenses related to that business to arrive at your net profit.

That's where most profit and loss reporting ends. But I've added time at the bottom: hours worked, commute, plus side-hustle hours, to arrive at total hours worked for the week. Divide net profit by total hours and you have your effective hourly rate.

This isn't something I think about once and move on from. I keep track of it every single month. For me, tracking my hours worked and my effective hourly rate is as important as the profit and income I'm generating. It helps me spot trends, identify patterns, and make adjustments in real time.

Conclusion

Start with one week. Calculate it and you might be surprised, or maybe even a little disappointed, by what you find. Watch the full video to see the spreadsheet approach in action.

Frequently asked questions