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My Dad worked on the assembly line for General Motors in Michigan when I was growing up. Every summer, GM would bring the assembly line to a crashing halt for a week or two so they could complete the annual model changeover. This is still known as the “summer shutdown“. They would basically re-tool the assembly line for the next model year and pay the line workers to stay home. I will always remember coming home from school and my Dad would be sitting in the sun in the backyard drinking a beer while loudly bragging to the entire family:
“I’m getting paid right now”
Paid? But he wasn’t even working? This was one of Max’s early introductions to the concept of paid time off.
In my mind, paid time off lands smack dab in the middle of the intersection of healthcare and personal finance. It should build a house there. Time away from work is healthy. It can help us unplug and recharge when conferences don’t do the trick. But having money to fund that time away from work is also necessary. It’s really at the heart of why people want to become financially independent in the first place.
Here we are at yet another convenient junction here at Max Out of Pocket.
Paid Time Off (PTO)
In my field, we don’t shut down every summer. Things keep right on trucking and there is always work to be done. But we do get vacation time. Since the beginning of my career, it always seemed like I have had more than enough time for vacations. For someone who values their time as much as I do, this has always been a good problem to have.
Vacation time and PTO are often used interchangeably. The healthcare world I have chosen to spend my professional career in often refers to vacation time as PTO (paid time off). Employees are usually given a set amount of PTO each year as a benefit in exchange for working at an employer.
Before accepting a job offer, PTO has always been one of my favorite parts of a benefits package to review when sifting through the HR paperwork.
Accumulating Paid Time Off
In my experience, PTO hours are generally accumulated each pay period and deposited into a “PTO bank”. Fancy finance people like me call this an “accrual”. This hour balance in the bank grows until the hours are used. Generally, employees can look up their total PTO hours anytime through an online payroll system or view them directly on their bi-weekly pay stub.
For example, I am currently accumulating 9.85 hours of PTO per pay period. Since I get paid every two weeks, I am adding more than one day off to my PTO bank every pay period. So, over the course of the year, I will accumulate approximately 256 hours of paid time off.
9.85 per pay-period X 26 pay-periods = 256 hours
This comes out to 32 days off per year.
256 hours / 8 hours per work-day = 32 days off per year
Which is equivalent to 6.4 weeks of paid time off per year.
32 days / 5 days per work-week = 6.4 weeks off
If I got hired into my company today, my PTO bank would be at 0.00 hours until the first pay period. At that point, I would have 9.85 hours in my bank. In my experience, most employers have a 90-day probationary period for employees who are hired. Generally, they discourage or straight up don’t allow the use of PTO during this time period. This gives the employee the chance to grow the balance in their bank and the employer a chance to fully test-drive the employee for 90 days without interruption.
Remember, things may be different depending on the employer. Most of my career has been spent working for two separate large health systems. My brother, who works in automotive, gets a lump sum at the beginning of the year.
Putting Value On Paid Time Off
I usually assign an annual value to my paid time off when evaluating a compensation package. With some quick multiplication, this is generally an easy calculation. PTO is usually indexed directly to the employee’s hourly wage. So, if I am a nurse in Michigan making $35/hour while accumulating 256 hours per year, some simple math will kick out exactly how much my annual PTO benefit is worth.
$35 per hour X 256 hours = $8,960 annual benefit
This is exactly how much money your company or health system is shelling out each year to cover your PTO in exchange for your work you complete for them. That makes my medical insurance policy valued at $21,504 look like a pretty solid benefit.
Most companies will put a cap on how much PTO an employee can have in their bank. That’s because to them, PTO is technically a debt they owe to you. Finance people like Max might refer to it as a liability. As employee wages grow through cost of living adjustments (COLA) and promotions, that PTO liability grows as well. But they also want to see their employees take time off.
For the health systems I have worked with, this PTO “cap” puts the employee in a “use it or lose it” scenario when they reach it. In other words, PTO stops accumulating when you hit the cap.
My current cap is 281 hours. This comes out to about 7 weeks vacation. I have been with my current employer for a few years now. Although I have slowed things down the last 18 months or so, for the first few years I had project after project lined up to where I had almost no time for a vacation. So, at the time of writing this, I have 260 hours of PTO. Clearly, I am quickly approaching my cap.
Here is a pretty nice summary of my PTO benefit.
With the 2020 pandemic, my company has briefly lifted the cap so healthcare workers are not disincentivized to work during this time of need. This was a pretty solid move if you ask me. That said, if I worked in Human Resources, I probably would have only included front line workers in this policy change, not bean counters like me. But then again, having a blanket policy was probably the path of least resistance in this case and saved HR from having to actually define what a front line worker is. Needless to say, I currently have some time before I need to worry about the 281-hour cap.
Using Paid Time Off
Remember, every employer is different here. For the health systems I have worked for, my PTO bank/accrual covers the ten federal holidays (with the exception of Columbus Day), sick days, and my traditional vacation days. This makes paid time off something we need to carefully manage.
These are the holidays my current employer covers.
- New Year’s Day
- Martin Luther King Jr. Day
- Presidents’ Day
- Memorial Day
- Independence Day
- Labor Day
- Veterans Day
- Thanksgiving Day
- Day After Thanksgiving Day (I think this was a substitute for Columbus Day)
- Christmas Day
This represents about 80 hours of my PTO. Assuming I take all these days off, I am left with about 176 hours for sick time and traditional vacation.
256 annual PTO hours – 80 hours for holidays = 176 hours for sick and vacation time
176 hours / 8 hours = 22 days for sick and vacation time
22 days / 5 day work weeks = 4.4 work weeks off for sick and vacation time
For Max, this comes out to 4.4 weeks of vacation since I literally never get sick enough to stay home. Pretty generous if you ask me.
One of the perks of working for health systems is, at least as a salaried employee, I have always had some flexibility around taking federal holidays off. In other words, if we were staying in town on July 4th to avoid the crowds, I would often report to work and blow through a project or two while the office was quiet. This allowed me to keep those 8 hours of PTO for later use. I do not think this is the norm in other industries, but I absolutely love this flexibility.
In our modern-day economy, PTO is an important part of the benefits package. It’s actually my favorite part of it. We need time away from work to stay healthy and productive. We also sometimes need time away for things that are unanticipated.
I have always been blown away on how much paid time off I have gotten from the health systems that employed me. For someone who never gets sick, it always seemed like a generous allocation.
It is important to understand this component of your benefits package. Since employers have a way of presenting the same information in different ways, it is important to try and standardize when comparing job offers. Building up this bank can be a powerful thing and in some ways can be considered a form of an emergency fund.
How much vacation time or PTO do you get per year?