How to Calculate Your Cost Per Hour: A Step-by-Step Guide

Whether you're deciding between DIYing a project or hiring a professional, understanding your true cost per hour is crucial.

It helps you make informed decisions about where to invest your time and resources.

Today, let's walk through a simple process to calculate your cost per hour, so you can better evaluate if you want to DIY it, or hire it out!

Step-by-step instructions:

Step 1: Determine Your Annual Income Needs

Start by figuring out how much you need to earn annually.

This includes not just your salary but also your household budget and desired profit.

For example, if you need to cover $60,000 in household expenses and want to add $20,000 in profit, your target income is $80,000.

Step 2: Calculate Your Total Work Hours

Next, estimate the number of hours you work each year, but tailor this to the lifestyle you want.

For instance, if you want to work a full-time schedule with two weeks off, that's around 2,000 hours per year (based on 40 hours per week).

Alternatively, if you prefer working part-time with three months off, you might work around 1,200 hours a year.

Adjust the number of hours based on your actual work hours and lifestyle preferences to get a more accurate calculation.

Step 3: Factor in Overhead and Expenses

Include your business expenses and overheads, such as office supplies, software subscriptions, utilities, and rent. Note: these are not your personal household expenses, you will have noted those in step 1.

Add these expenses to your annual income needs to get a comprehensive view of your total costs.

For example, if your annual business expenses are $10,000, your total cost becomes $80,000 (income needs) + $10,000 (expenses) = $90,000.

Step 4: Calculate Your Hourly Rate

Now, divide your total annual cost by the number of work hours you calculated. Using the example figures:

• Total Annual Cost = Annual Income Needs + Annual Expenses

• Total Annual Cost = $80,000 + $10,000 = $90,000

• Hourly Rate = Total Annual Cost / Total Work Hours

• Hourly Rate = $90,000 / 1,500 = $60

So, your cost per hour is approximately $60.

IMPORTANT: This does not factor in lost opportunity cost for the time you would have spent DIYing the thing you're calculating for, but it's a good idea of at least a side by side comparison if you want to do it yourself or not.

This helps you evaluate whether DIYing a project is worth your time or if you should hire a professional.

Shortcut: Using Your Client Rate

If you already charge clients an hourly rate, you can use this as a shortcut for your cost per hour. This is what I use myself to calculate hiring out certain things.

Simply compare your client rate to your calculated hourly rate to gauge if the DIY effort aligns with your business goals.

For instance, if you charge clients $100 per hour and your calculated cost per hour is $60, you’re effectively earning a higher rate when working on client projects rather than DIYing your website or other tasks.

Step 5: Use Your Hourly Rate for Decision Making

With your hourly rate in hand, you can now compare it to the cost of hiring a professional.

For example, if a website redesign costs $3,997 and you estimate it would take you 80 hours to do it yourself, your DIY cost would be:

• DIY Cost = Hourly Rate x Total Hours

• DIY Cost = $60 x 80 = $4,800

Compare this to the cost of hiring a professional and consider not just the financial cost, but also the value of your (or their) time and expertise.

My hourly rate is currently $147/hr CAD, so if the cost to hire something out is less than that and I have room in my budget, and if DIYing it is going to prevent me from being able to work and charge this money to clients, then for me it's a simple "hire it out" answer (most of the time).

Tips for Accurate Calculation

• Track Your Time: Use time-tracking tools to get accurate data on how long tasks actually take.

• Review Regularly: Update your hourly rate calculation annually to reflect changes in income and expenses.

• Consider Opportunity Cost: Factor in what other revenue-generating activities you could be doing with your time.

Understanding your cost per hour is essential for making smart business decisions.

By following these steps, you'll be better equipped to decide whether to tackle a project yourself or invest in professional help.

If you're looking to connect with me on one of my free coffee chats, CLICK HERE

Happy calculating!

-Brittany