The most common misconception about wealth is that you need to earn more income to be worth more.
Your net worth isn’t compromised solely of your income, or at least it shouldn’t be.
It can be tricky to calculate one’s net worth off the bat because it’s scattered all over the place which in fact is an excellent thing. More diversity the better.
Can you image if your portfolio was compromised of 100% equities? Even worse full of cyclical stocks such as hotels and airlines during the peak of the crash in March 2020 when the Dow declined 26%?
If you were wise as a long-hauler and didn’t sell, you would’ve recovered by now but if you jumped in right before the peak, you would’ve been toast!
Calculating net worth is like taxes. We’re told it’s simple but everything is everywhere. You can read about it here.
Essentially, the more assets and liabilities you own and owe, the trickier it is. Although you shouldn’t obsess with your prized number since your worth fluctuates all the time especially if a majority of it is invested in the market such as the top 10% who depend on and own 90% of the wealth in this country, setting milestones of generating more zeros under your name is a great incentive to keep your head up and grind because depending on income won’t get you nearly as far.
Your net worth is comprised of various sources from investments to physical tangible real estate, W2 earned income, passive income streams, life/health insurance, 401 (k), pension, trust fund, inheritance, alimony, spouse, foreign investments, cash and I’m sure I’m missing a ton.
As you can tell, compiling your net worth is not as easy as counting your cash in your savings or shares of Tesla.
2/3rds of college graduates leave with an average of $30k in student loans under their belt and most of the time credit card debt as well. This is the biggest burden a youngster could have when starting out their career since it can seriously harm their financial future if they aren’t stringent about spending and saving, especially when interest rates rise since it compiles quick.
Due to the current low interest rate environment these days, paying off student loans has been easier yet as the Fed closely tracks inflation for the next few months, it plans on tightening credit sooner than later as the economy seems to be coming back to speed as the CPI index recorded a rise in consumer spending, less borrowing, defaults, overdraft fees, more pent-up demand with labor and supply chain shortages, increased cash load, savings and overall less overall consumer debt which includes credit card and student loans, the biggest source of debt for consumers.
This makes banks angry as they generate the most revenue from late payments, overdraft fees and defaults. They charge you double the interest as they would reward you for your savings. They didn’t expect consumers to be diligent with their finances during the recession. Economic benefits such as stimulus aided consumers tremendously as banks were sitting on a pile of cash expecting to give it out to borrowers with poor credit scores and low creditworthiness.
Although the amount of consumer debt in the U.S. is still at a staggering 12 trillion and increases by a couple billion each year, it’s much less than expected as banks were preparing for defaults to come about with frivolous lending yet Americans learned their lesson about diligently saving and spending, having an emergency cash cushion and not putting all their eggs in 1 basket. Most importantly, consumers were reminded to never rely on 1 income to keep themselves afloat which was probably the biggest lesson in all of this year.
Ultimately, “risk whatever you’re willing to loose” and “plan for the worst hope for the best” were the mottos of 2020 and I hope they stick.
Being able to resist the temptation of depending on someone is your biggest ally in life specifically for women as they live longer than men and should never rely on them as the sole bread winner let alone decision maker.
The reason I say this is because far too many Ameircans fall into the trap of focusing too heavily on income out of school. They kill themselves working as slaves for bulge bracket investment banks with 14 hour days only earning $15 per hour to barley make ends meet in high-cost cities of New York and San Francisco believing that income is all they need to ‘live the dream’.
It’s a dangerous lifestyle focusing on W2 income since the more you make, the more you pay in taxes.
In the corporate world, the reward for doing good work is more work and that doesn’t always equate to living freely especially when you are beholden to making more to support yourself and loved ones after all these years. I find most graduates are only allured by the paycheck and don’t care about diversifying their passive income streams while also providing themselves a mental and physical break that their future selfs would desperately thank them for.
The imperils of relying on 1 income source or a company to keep you afloat is dangerous. The stock market is the most accessible market in the world which also happens to be an inflation hedge, a deferred tax and unrealized game machine and a place where you can allow your money to work for you not against you without sacrificing your time.
Unfortunately with only 60% of the U.S. invested in 2021, there should be no more excuses. With free commission trades, no accredited investor badge necessary for most transactions and the option of fractional shares, there’s no reason not to make it easier on yourself! Yet majority of Americans are still living pay-check to pay-check working towards that bonus because they simply don’t want to dedicate a few extra hours per week to earn them a better existence for a few more decades later on.
Education is the best way to get ahead. You don’t loose; you either win or don’t learn.
It’s all priorities.
-Don’t rely on 1 income source or employer to keep you afloat
-Realize that everyone is replaceable
-Nothing is guaranteed or stable long-term except the major indexes gains overtime
-You have the choice to keep yourself more secure or follow the riskier path
The 3 Stages of Income
If you’re someone who believes your earned income is only 1 single sliver of your portfolio + net worth, you are in better shape than someone making millions per year never relying on any other source to keep themselves afloat.
Now don’t get me wrong. Focusing on income is important but slowly fads when you get older.
Stage 1: Typically when starting our your career after graduating college, there’s not much to your name. I don’t blame you. College doesn’t teach us financial literacy and even if you attended HS in the 14 states that do require a 101 finance course to graduate, I’m sure they asked you to memorize the information instead of apply it so you forgot anyway.
You could have started a side hustle e-commerce shop selling rubber bands or making YouTube videos while graduating or during your first few years of work which could easily surpass your junior salary at some firms, yet for 90% of students, school takes up an enormous amount of time already so there’s no real time for earning substantial income. As a result, our summer jobs and full-time career make the biggest difference in our accounts and help propel our net worth to pay for expenses to finally be independent. At this time, focusing on income is more important than ever but never neglect your biggest advantage at this stage: time since returns compound and that happens in the market.
I would rather have more time than money.
Stage 2: After you’ve settled down, have a stable job for a few years, maxing out your 401(k) and investment portfolio, hopefully Roth IRA as a great starter, in between all of that, I would drill down onto alternative investments at this point. Whether it’s in private equity to venture capital, artwork to real estate, keep yourself afloat by digging into these since they offer great hedges against inflation and volatility. Endowments are heavily invested in alternative investments by 60%, specifically Yale and Harvard. They’ve returned over 30% ytd! Plus at this age you may be thinking about changing roles at a company or moving to a different sector which will require you to have a more modest portfolio and other sources of income.
Most professionals switch around after a few decades or years and want to try something new. It doesn’t mean you’re lazy or don’t like the people, we are just diverse and curious creatures! When more changes occur in your professional life, personal changes come about as well. These typically include starting a family, buying a property after renting for the past few years out of school and living the American Dream!
More changes = more disposable cash on hand and plan B! At this point you are earning more than a junior settled into your career. If you started investing early on in terms of building your Roth IRA or main portfolio, you can likely start to see your investments amassing more than your regular income. It could easily grow higher especially since compounding works wonders and the major indexes always go up.
Time in the market is more important than timing the market.
Stage 3: This stage in life is when you are ready to really settle down and your investments take up a substantial stake of your net worth. You’ve had a career for a solid few decades, grown an incredible loving family and made true memories in and out of work. Hopefully!
Your investments are now the majority of your wealth. Ideally if your net worth was 20x your gross income for the past couple of years, you are golden but not completely clear since it isn’t everything. At this point no matter how much you made in your career, your investments most likely generated you more even with bonuses and consecutive salary raises overtime.
Let’s pretend you didn’t invest anything. You would have a high salary since none of it is automatically allocated to your 401 (k), investments, savings, Roth, etc. yet that would entail you would probably fall short of your retirement goals since you would spend a majority of your income instead.
That’s why paying yourself first is key. Don’t look at the money. Automate and let it work on its own saving 50%+ instead.
You could be making millions at a firm but if your employer doesn’t offer retirement plans, insurance benefits, PTO or maternity/paternity leave or you spend 90% of it, what’s the point?
Your investments are stronger.
Having a stable job and career is a basic necessity and goal we all strive to have to make ends meet. Just from a moral sake, if you don’t have something to look forward to waking up to every morning, life gets boring quick. Following the FIRE movement and retiring at 30 will become the most stressful life event especially since inflation is inching higher and retirement is the most expensive part of your life. Read here why Millennials are making a bad decision with retiring right after school.
As we’ve covered earning a livable wage will be your largest source of income when first starting out. Yet as you get older, no matter how much you make, being a part of the market and diversifying is key. Allocating funds in small chunks through DCA (Dollar Cost Averaging) is better than lump sums through windfalls. You are less likely to allocate it poorly and spend it all on yourself. Welcome to the lives of broke lottery wins and super star athletes.
Earning More Isn’t The Golden Ticket
The more you make, the more you give up to the government and spend on yourself. Since 70% of the country is financially illiterate, they are likely to go broke if they earn more.
I have a lot of colleagues that are in the top 1% income bracket making $2m per year but between their hot Hamptons home, alimony between their ex-wife, private school tuition, they are burning more than earning.
It’s too easy to fall into the trap of believing that we will get more and more as we get older. You aren’t that awesome and staying grounded and humble will leave you better off.
Instead of obsessing over earnings focus on how much you are burning. From subscription fatigue (read here) to overconsumption, “buy 1 get another 1 free” we live in a world of endless spending and comparison.
Force yourself to save a little bit of money. Saving a little bit of money at a young age goes a long, long way.
As Professor Galloway states, “The one thing I can promise you is that time will go faster than you think, and savings will compound faster than you think. So it’s hard and I’m not saying that this is something that most people have the discipline to do, but the people that have the discipline to every month put a little bit away and start focusing on creating passive income are the ones that are going to be rich you know no matter or not whether they have that big hit.”
Don’t be allured by partner salaries or MD paychecks. They could be broke spending 90% of it already too late to the market missing the greatest opportunity for wealth generation.
Focus on what’s best for your stage of life and utilize your most precious asset: time. That way you’ll be golden forever.