This article is by staff writer Adam Baker. Baker recently released an online guide entitled, Unautomate Your Finances. J.D.’s note: According to Facebook, today is Baker’s birthday. Happy birthday, Adam!
In continuing celebration of Financial Literacy Month, my GRS contributions throughout April are covering basic techniques to raise your financial awareness. Last week we covered a few methods of getting to know your debt. This week we’re going to attack the income side of the equation.
When it comes to income, there are two situations that can benefit immediately from increased awareness:
- An individual who earns a decent living, but is squandering their money.
- An individual who is not earning up to their current value (let alone their potential).
There are variety of causes for each of these scenarios. Lifestyle inflation could be causing a high-income earner to live paycheck-to-paycheck, a timid person may feel anxiety over negotiating a raise (even if well-deserved), or fear of failure may keep an entrepreneur from launching a much-needed product or service.
In most of these cases, the individual is unaware of the source of the problems. They usually aren’t fully cognizant of the immense value of their high-income or just how much they may be leaving on the table. Just as with debt, we often need a jolt or a fresh way of looking at our income to put things into perspective.
Calculating how much income you’ve made over your entire life
If you’ve never taken the time to calculate how much income you’ve made over the span of your entire working life, the results can be eye-opening. Even as a relatively young pup (I’m 26), my total income total floored me!
Courtney and I have combined to earn several hundred thousand dollars over the last 7-10 years, despite attending college, slacking off considerably (okay, this was just me), and taking a year off to travel. After running a quick income estimate, I was left with only one question: “Where did all the money go?”
Obviously, there were a lot of expenses during that period. We stayed warm, dry, fed, and mobile. But taking out the cost of our basic needs (and even some of the very basic wants), there was still at least 50% of the income I couldn’t account for. Several hundred thousand dollars over the last decade seems to have just vanished! I feel incredibly foolish for having burned through so much earning power.
After the initial shock wore off, I had another revelation. As high as that end number seems, when I look over my income numbers on a yearly basis, I realized I was earning far less than my potential. My income was like a roller coaster, with some years nearly non-existent and others containing higher peaks. Every time I finally started to earn a decent income, I’d always change direction!
Looking at these yearly numbers switched me from thinking, “Holy cow, I can’t believe how much money we’ve made over the last several years…” to, “Holy cow, I’ve really been limiting my income potential these last few years.” This little exercise really made me think!
Tips for keeping it simple
If you choose to run the numbers for yourself, don’t make the mistake of turning it into some sort of economics dissertation. Try to keep it simple:
- Think back to “phases” in your income in recent years. Most of us have specific blocks of time where our income was relatively consistent. If you’ve worked the last 5 years at the same position (roughly the same income, with a few slight variances), just apply an average salary for that one job/position.
- Round your annual income. The nearest $5,000 or $10,000 is usually fine. Simply multiply your rounded income by the “block of time” you spent at that earning level.
- Adjust for inflation, but use rough averages. For those with many decades of “wisdom” under their belt, it’s important to adjust for inflation. Use this handy inflation calculator to estimate the rate of inflation from a specific month and year to the present day. I’ve included some very rough numbers below you can use as a rule of thumb.
- Multiply income earned in the ’50s by 8. (Rough inflation from 1955 to 2010 is 711%)
- Multiply income earned in the ’60s by 7. (Rough inflation from 1965 to 2010 is 595%)
- Multiply income earned in the ’70s by 4. (Rough inflation from 1975 to 2010 is 316%)
- Multiply income earned in the ’80s by 2. (Rough inflation from 1985 to 2010 is 105%)
- Multiply income earned in the ’90s by 1.5. (Rough inflation from 1995 to 2010 is 44%)
- Multiply income earned in the ’00s by 1.1. (Rough inflation from 2005 to 2010 is 14%)
Using these simple tips makes it easier to get a estimate of the total income you’ve earned over your working years. I’m not suggesting you dwell on this number (either on the positive or the negatives), but rather to compare if it’s close to what you expected.
Are you left wondering as I did, “Where did all this money go?” Does factoring in inflation mean you’ve actually decreased your earning power over the years? Calculate your lifetime income and let me know!