How many people really think about what their vacation time is worth and examine it from a financial perspective? (Yes, I realize many people would say they don’t care, it is vacation time!) Do you plan your vacation time, or just burn it as needed?
I have an interesting dilemma. I literally have the opportunity to trade my time for money. In this case, it is vacation time. Before you call me captain obvious, I know I already trade my time for money each day by working as a salaried professional. Let me explain further.
A Working Vacation Accrual Example
I think it is best to illustrate my point using an example. Let’s say Sally the Advertising Staffer gets paid $50,000 (to keep it simple this includes all bonuses). She also gets two weeks of vacation each year. If she uses all of her time off, she gets paid $50,000 for the year.
If she takes zero days of vacation and lives in the right state, she actually made $51,923 (a 3.8% raise!). Magic? Nope, just by being in a state or by working for a company with a vacation accrual cash out policy, she actually has a $1,923 “savings” account in the form of accrued hours in the company payroll system. According toNolo.com about half of states mandate that any accrued vacation time be cashed out when an employee leaves.
If she were to leave the company, she would get that amount included on her final paycheck. It gets taxed like regular wages, but it could also be used to fund 401k, 403b, or 457b plans!
Continuing that example, let’s say Sally works too much and only takes 1 week of vacation each year in years 2 through 4. That is 3 more weeks of vacation added to the original 2 for a total of 5 weeks off. At her hourly rate of $24.04, that accrual is now worth $4,808. But what about any raises she received?
Because her annual pay has increased, each year her accrual increases by her raise percentage! If we assume Sally got a 3% raise each year, then the accrual is worth more than we thought. The chart below shows that the accrual is actually worth $5,253 or 9.25% more than the $4,808 without raises.
To be clear, I am not promoting that people avoid taking vacation days. I am only pointing out a hidden bonus program that you may have available to you. I have many times explained this to employees at my company and I think they appreciated gaining the knowledge.
I think realizing you might be able to trade some time off for part of that 3.8% bonus of annual vacation pay might help some people travel more, pay off debt, or improve their financial situation.
Back to My Dilemma
In the last fifteen years, I have worked for four different companies. None of them has been smaller than 700 employees. The biggest was an international company with thousands of employees. Two of those four companies offered some sort of vacation cash out program during your employment. The same two cashed out your vacation hours upon termination.
I am currently allowed to cash out up to 40 vacation hours each year. I would normally accrue 160 hours (4 weeks). I don’t ever feel like I have enough time to take that much time off, so I elected to do a 40 hour cash out this year in December (in California you have to elect it before the calendar year starts and accrue that amount but not use it- very complicated).
I don’t want to spend more time away from my kids, but this is like a hidden bonus program that many people don’t think about. I can not only get an extra week’s pay, I can push that into the company retirement accounts to help me max out for 2015!
My other options are to take more time off or to let the balance just get larger and larger. Both are viable alternatives depending on your company. Taking more time off is great, but can also be stressful as an executive to make sure things are still running smoothly in your absence.
At this point I am looking at using about 96 hours (12 days, which is 60% of a year’s accrual), cashing out 40 hours (5 days or 25%), and letting 24 hours accrue in my bank for the future (3 days or 15%). I like being able to use the cash out at Christmas time to travel and for gifts. 12 days off is enough for a week long vacation (like Hawaii) and several 3 or 4 day weekends, and the other 3 days might be used if a good deal comes up or are there for an emergency.
If I end up using more time than I planned, the 40 hours of cash out just gets reduced (automatically) to the amount that that I accrued but did not use for the year (again a confusing sentence). That is not a big deal to me since if I use more time off I probably had a good reason. Besides, the cash out is helpful, but my family is not depending on it.
Other Considerations Around Vacation Time
Don’t forget that you can still have a vacation cap. A typical one is 1.5 times your annual accrual. For example, if you get 2 weeks of vacation each year, the most you can have accrued is 3 weeks (2 x 1.5 = 3 weeks maximum).
Some companies have an unlimited cap. This makes the vacation accrual even MORE valuable. If you only use half of your time off for several years, you may end up with a huge bonus when you leave, retire, or move on to other opportunities. I don’t want to say what my current cap is, but it is high enough to not make me have to burn days each year to avoid missing out on further accruals.
For some with unlimited or really high caps, this becomes an additional retirement account of sorts! Just as an FYI, it is taxable and a huge balance could affect your taxes significantly so think about it!
If it was not obvious, if you have a cap, you need to monitor it! Why give away vacation time because you didn’t plan ahead? When you hit the maximum, you no longer get vacation hours added to your bank. That is the equivalent of taking a pay cut!
I briefly mentioned keeping days for an emergency. That is important too. If I run out of sick time, have a family matter to attend to, or some other reason causes me to need extra hours, having some in reserve is important. Currently, I have about 2 weeks in reserve. If my plan works out, I would have closer to 3 weeks left at the end of the year.
So now that I have laid out my confusing, but enlightening take on accrued vacation time I thought I would mention some examples. Your vacation definitely has a defined value! Below are some examples:
- If the US median salary in 2014 was $51,939, each 8 hour vacation day is worth $200 to the person making that wage
- The average Walmart employee makes $8.81 an hour. That is $18,325 annually, making their vacation time worth about $70.50 per day off.
- A college graduate with a bachelor’s degree is around $45,478 for 2014. This means their vacation time is worth about $175 a day to start.
- Warren Buffett’s salary is technically $100,000. That means a vacation day for him is worth only $385. Though in his case there is so much additional compensation, his time is probably worth much more!
- The President of the United States makes $400,000 per year. That would make a presidential vacation day worth about $1,538. Does the President really get time off? I don’t think so. Yes, he (or she) gets vacation days, but I think they are always on duty at some level.
- The minimum salary for a Major League Baseball player is $500,000 per year. That is 20% more than the President and 5 times Warren Buffett’s salary! They obviously don’t get vacation days, but I still thought it was interesting to add. If they did get time off, each day would be worth $1,925.
So how much do you think your vacation time is worth?
I am not an expert on labor law, but this is just my musings on the subject. Also, a paid time off or PTO model can work the same or a different way. Much depends on the company policies and the state that you work in currently. I hope you enjoyed my ramblings!
Even if you do not have the option to cash out vacation, be aware of it when negotiating a new job, looking at new opportunities, etc. Those funds can be used to easily top off Roth IRAs or to get extra into 401k accounts each year!