Question on Per Diem ? Paying it back

But wait...couldn't you achieve the same "good thing" by just going to work at McDonald's?

Okay, I get that the comparison doesn't quite hold up, because they don't pay you per diem at McDonald's to make up the difference. But still, artificially lowering your earned income is generally not a wise thing to do: think mortgage applications, think vacation pay that's based on 1/52 of previous year's earned income per week, think workers compensation insurance, etc.

This is a fallacy. It sounds great on paper but doesn't hold up when you get your hands dirty and actually crunch the numbers.

To do the analysis right you have to select a realistic ROI figure––actually, feel free to use an unrealistic one (currently, anyway) like say 10% annualized––and then calculate your total gain on investment using a dollar-cost-averaging approach weekly (or maybe semi-weekly depending on how often you're paid) over the course of one tax year using only your per diem pay as the principal amount of the investment, then compare this gain against the sum of the numerous losses attributable to per diem––a few of which are mentioned above––vs. earned income.

Here I'll do a little calculation. Let's suppose you're paid $13,000 in per diem over the course of a year. That's $250 per week. Let's suppose your first week's payment is invested for one full year, or 52/52nds of a year, your second week's payment is invested for 51/52nds of a year, etc. up to your 52nd week's payment invested for 1/52nd of a year. Assuming simple interest, your total gain on investment will then be the sum of:

52/52 times (10% of $250) = $25,
51/52 times $25 = whatever,
.
.
.
1/52 times $25 = whatever.

This sum equals

(1/52 + 2/52 + 3/52 + ... + 52/52) times $25
= [(1 + 2 + 3 + ... + 52)/52] times $25
= [([(1+52) + (2+51) + (3+50) + ... + (52 + 1)]/2)/52] times $25
= [(53 times 52)/104] times $25
= 53/2 times $25
= 26.5 times $25
= (25 times $25) + (1.5 times $25)
= $625 + $37.50
= $662.50.

Okay great, you're now ahead $662.50 with per diem as opposed to earned income. But what if your company charges you 2 cpm for the "privilege?" As I'm sure you're aware, many companies sock the driver with a per diem "administrative fee" that can be as high––or even higher than––2 cpm. To legally get that $13,000 in per diem pay, you pretty much had to drive at least 100,000 miles. How much money is 2 cpm times 100,000? Well, it's more than three times $662.50, that's how much!

Even if it was just an administrative fee of 1 cpm you'd still be in the red already, without even beginning to account for any of the other numerous losses per diem causes the driver.

Yup, you got that right!