What is your salary really worth?

Across the Internet, around the watercooler at work, in pubs and at garage sales, people are talking about how they’re going to make some extra money on eBay, or by trading shares, or by setting up a blog.

It seems much less common to talk about your salary, or about how you plan to get a raise over the next 12 months.

Perhaps there’s a taboo about discussing your salary, particularly here in class-conscious Britain? A reticence that doesn’t extend to boasting about how you bought a small-cap growth share that turned into the next Microsoft, or the profit you made selling a secondhand scooter on Craigslist.

This is ironic; as I discussed in the first post in this series on salary, the income we make through working is the most important source of money most of us will ever enjoy.

But exactly how important is it? What is your salary really worth?

Obviously if you’re made redundant and subsequently you can’t keep yourself and your family well-fed, or you fail to pay your mortgage and lose your home, the answer is your salary was worth everything.

But there’s also a straightforward way to put a value on your salary in cash terms, using the same method I suggested when we discussed passive income streams.

Salary versus passive income

Let’s say you earn £35,000 a year (about $50,000), which keeps you neatly below the higher tax threshold in the UK.

While that income is around 40% higher than UK average earnings, it’s still pretty modest compared to the best professional salaries, even if we disregard the ‘superstar’ professions such as medicine or finance.

Yet 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!

Investing in shares would make replacing your salary easier; it would be fairly straightforward today to establish a high-yield portfolio yielding around 6% in dividend income, if you can stomach the risk.

Given the favorable tax rates on dividends versus earned income or cash interest, you might even get away with a £400,000 pot to fund your salary replacement.

Still, by any measure £35,000 a year is a very valuable income stream that would cost you hundreds of thousands of pounds to replace.

That’s exactly why redundancy and income protection insurance is so expensive, incidentally, and why insurance companies put so many hurdles in your way to avoid having to pay you if you’re forced to stop working.

It’s also why long-term unemployment costs governments with a strong welfare state so much money, even before you take into account the lost tax revenues.

Your salary is worth its salt

Salaries have been important for thousands of years. The word salary comes from the Latin word salārium, which was the sum paid to Roman soldiers to enable them to buy their daily salt.

Perhaps its very antiquity is why today we’re so turned off by committed improvements to our salary. Or maybe we’ve just grown up hearing about too many self-made millionaires and Deal or No Deal winners.

I’m definitely not against people looking to make more money through second income streams or investing (even if I do think start-ups are very risky). Such ambition is the main theme of Monevator.

But as I’ve show above, your humble salary – and the health and skills enabling you to earn it – are already extremely valuable financial assets to have.

Seen like that, you may still want to quit your job but at least you’re reminded why you do it every day.

This discussion is also why I think it’s more illuminating to target income rather than a net worth figure when looking towards financial freedom.

For most people, financial freedom means the freedom to work as they see fit, rather than because they have to in order to be housed and fed; in other words, to earn a salary whether or not they work for it.