Tuesday, May 24, 2011

The Amount of Money You Will Earn is Finite

The amount of money you earn in a lifetime is a very finite number.

As a young man, I didn't worry so much about money, other than to wish I had more of it to buy fancy toys and junk - as well as beer and pot.  There would always be more money down the road, or so I thought, either next payday, or when some great ambiguous payoff happened.  You are young and life is long, and there is time to kill today.

And as I got older and started making markedly more money, I deluded myself into thinking that I was going to make more and more as I got older, and thus didn't need to worry about money.  After all, I was making "good money" and on a career path to make a lot more.

But even if you are in a well-paying field, the amount you will make over your lifetime is a finite amount.  And you can pretty much calculate now how much that will be.  And of course, it may turn out that you make less than you expect to make, and in fact, that is a norm.

Now granted, some of us get lucky - we make good money in Real Estate, or get lucky in the stock market.  Others of us have money handed to us as an inheritance (which itself is finite).  But regardless, the big mistake most of us make is in assuming our incomes are an open-ended equation and that our opportunity to earn is basically infinite.

It is only when you get older, and start to think of the remaining years in your career and the remaining years in your life, that you realize that how much money you will make between now and retirement is a very, very finite amount.  And for many folks, getting laid off at age 55, this turns out to be a much smaller amount than they thought they would have!

At age 50, you realize that you may have 15 years of productive employment left - if you are lucky - and you can calculate quite easily how much money you will earn, what your expenses will be, and how much you will end up with in retirement.  For many of us, this can be a scary number.  And for many of my generation, a positively petrifying one.

But why wait until your career winds down to figure this out?  If you can think about this at age 40, 30, or even 20, you might better manage your finances.

The good news is, while the total amount of income you will receive in your lifetime is a finite amount, chances are it is going to be a good amount of money - well over a million dollars, perhaps millions.

The median income in America is about $50,000.  Over a 45 year working life (age 22 to age 67) that can easily amount to $2,250,000.   That's right - two and a quarter million dollars.  And yet, if you asked most people who make 50 grand a year, they will tell you how put-upon they are and how poor they are.  But for the most part, this is because they spend all they make - if not more - and pay a lot of this money in interest payments.

The downside, of course, to making this calculation, particularly at an early age, is that you might come away thinking, "Gee, I'm going to make a million bucks!  I'm rich!"  But the reality is, you only become wealthy when you accumulate wealth, not spend it.  So the more you can save from that salary, the wealthier you can become.

As I have illustrated before, if you can save $5000 a year for 45 years at 5%, you can end up with over $800,000 in retirement savings, which is pretty impressive for someone on such a "low" salary.  Combined with equity in a home, you can easily be a millionaire by the time you retire.

But you have to chose to do that.  And many chose instead to spend that $5000 on a car, or a boat, or a jet ski, or interest payments.  And they mortgage their house to the hilt and retire with nothing.

Once you figure out that the amount of money you are going to make is not infinite (and most of us assume that anything over five figures rounds up to infinity) you can make realistic plans about saving some of this money to accumulate wealth.  Once you realize the well is only so deep, you start to think harder about how much water to draw from it at any given time - and whether the use of that water is frivolous or not.

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