Understanding hourly vs salary pay conversion | Employment | Financial Literacy | Khan Academy

Let's say that you just got two job offers, and these jobs are pretty identical to each other except for how they gave you the offer. So, the first job, they tell you that it is $30 an hour, and they're going to expect you to be there 40 hours per week. Then the second job, they're offering you $60,000 per year, and they're also assuming that you're going to be there 40 hours a week. Which one is giving you better pay? Pause this video and see if you can figure this out. What's better, $30 an hour or $60,000 a year?

All right, now let's work through this together. Now, one way that many people will often do this—and you might have just tried to do this way—but I'll tell you in a second is a mistake, is to say, “Okay, I'm going to take my $30 per hour, multiply that times 40 hours per week, multiply that times four weeks in a month, and then multiply that times 12 months in a year.”

Before I tell you why this is incorrect, let's actually calculate what we get by doing that. If we take $30 times 40, that's going to be $1,200. Times 4 weeks is going to be $4,800. Then, if we want to multiply $4,800 times 12, at the risk of me making a simple math error while y'all are watching, I will just do that here. $4,800 times 12 is equal to $57,600.

Let me just confirm my math. So, I took $30 times, let me do it down here so you can see what I'm doing: $30 times 40 hours in a week times 4 weeks times 12 months in a year, I got $57,600. So, if you just did that calculation, you might just say, “Oh wow, this job right over here is better: $60,000 a year versus $57,600.” But I just told you there is a mistake.

Can you spot the mistake? Well, if you think about just what happened, you didn't realize that most months actually have more than four weeks in them. There are actually 52 weeks in a year, and the way we just calculated, we assumed there are 48 weeks in a year. So, the correct way to do this would actually be to take your $30 an hour, multiply it times 40 hours in a week, and then to get to the year, multiply that times 52 weeks in a year.

And if we do that, we're going to get a different number. So now, let me do it up here: $30 an hour times 40 hours in a week times 52 weeks in a year gives us $62,400. $62,400, which gives us a very different number. This is almost $5,000 higher than our previous number, and now all of a sudden, it looks like the $30 an hour job is better.

So, the big takeaway from this video is, if you're trying to convert between hourly and annual, remember: don't just estimate how many weeks are in a month and then multiply by 12 months in a year. Or if you're going the other way, divide by 12 months and then divide by four weeks. Think about multiplying by 52 weeks in a year. Or, if you're going from annual to hourly, think about dividing by 52 weeks in a year.

Now, I know what some of y'all are saying. Well, this might be roughly right; this $30 an hour looks better if I just take it all together like that. But maybe this job right over here that isn't hourly is more salaried, and maybe they're going to give me other vacations. I'm going to get national holidays, I can take sick leave, and that might indeed be the case.

So, what I just showed you is a very superficial quick calculation, which I want to make sure that you're going to do correctly. But you also have to think about other differences that might exist in the job. This job, for example, because of the vacations, might not actually make you work as many weeks as the calculation implies.