I’m a little late linking to this interesting post over at Monevator which discusses what your salary is really worth to you.
In order to work out what it is worth to you (and not just the amount you know you’re earning each year), they suggest you look at your salary in relation to how much you’d have to earn as a passive income.
Let’s say you earn £35,000 a year (about $50,000)… to earn just £35,000 a year through passive investment income will be an impossible task for most of the population. With cash interest rates at around 3-4%, you would need around £1 million in cash to generate the same income as your £35,000 a year job. This is just one reason why younger lottery winners usually end up back in work!
It’s an interesting way of looking at things, and certainly helps to put your salary in to some perspective.
A lot of us concentrate on generating a second income, from hobbies and a variety of side businesses – but by comparing your salary to a passive income, would it not be better to be concentrating on advancing in our careers?
For more thoughts on making the most of your salary, it’s also worth reading Monevator’s follow up post on turbo-charging your salary with compound interest.
Just to take this subject on a little, if you are considering what your salary is worth to you (perhaps you’re wondering whether to change jobs?), then you definitely shouldn’t forget to include any other benefits in your overall calculation. If you receive death in service benefit (life insurance provided by your company), or your company contributes to a pension for you, or there are any other valuable benefits such as group income protection or healthcare, then although you might be moving to a job with a higher salary, make sure the package gives you all that you’re currently getting.
Of course, people change jobs for other reasons than just money, but if that is your main motivation to move, make sure you’re comparing “like with like”.
photo credit: a.drian
Hey, glad you found the articles interesting, and cheers for the links.
Very good point about benefits. That’s something I forget quite often myself, as I’ve been self-employed and/or doing contract work and/or working for start-ups for so long now.
Funnily enough I was talking to a friend just the other day about his job, and whether he should go it alone. His benefits package in itself (including everything from gym membership to a car, a pension to share incentives) was probably worth about the UK average wage, but he’d barely considered it in his calculations!
Congrats on your Twitter dominance, by the way. :)
Two great articles there. With regard to passive income, if you were fortunate enough to have that level of investment readily available to provide you with a passive income that would be great.
The difference in reality though is that the passive income provides you with the real added bonus of not having to give up 40-50 hours of your life each week to earn that salary.
There is therefore an opportunity cost here – working 40 hours per week to earn £35,000 per annum means you are not free to do other things with that period of time.
If you were in a position to draws say subsistance level of income from your investments to cover all the “necessary” expenses in life then you would probably find that you don’t actually need £35,000 from your passive income source to fund your lifestyle!
In this respect then financial freedom is closed than a lot of people think.
Simon