Calculating Your Life-Time Income

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:

  1. An individual who earns a decent living, but is squandering their money.
  2. 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%)
Note: When you consider inflation, you may realize that even though you've been getting a “raise” every year that your income is actually remaining fairly equal in it's purchasing power!

 

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!

More about...Planning, Side Hustles

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others
guest
30 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Brian
Brian
10 years ago

In the US, I believe you can get a rough estimate from your Social Security Statement. That little flier they send you every year which tells you how much you’ve paid into the system and your projected benefits, also shows your taxed income for each year.

See page 3 of the sample here: http://www.ssa.gov/mystatement/currentstatement.pdf

Patrick
Patrick
10 years ago

I found this to be an extremely useful exercise my first year out of college earning the big bucks. It happened for me when I filed my taxes. I stared at my W-2 and then stared blankly for a few moments at my savings account and wondered why more of my W-2 was not sitting happily in my bank. I was surprised after doing some calculations to answer all the ‘where did all the money go’ questions. Ultimately, it helped me re-frame what my priorities were and to develop a better plan for the next year. The second year when… Read more »

Rosa
Rosa
10 years ago

This goes back to the money or happiness topic from the previous post: I can make a lot of money in less than 40 hours a week and still be politically active and fulfill my family obligations – but it takes all the hustle I’ve got, leaving me a zombie at the end of a few weeks or months.

In the ’90s, with that 1.5 multiplier, I made 4x as much money as I do now. And I was pretty happy. But I gave up a chunk of that money-earning potential to have a family and give them my best.

Mark
Mark
10 years ago

This is a poor way to look at inflation. If you want to talk purchasing power, consider how many hours one person had to work in the 50’s to buy a television (one example), then consider how many hours it takes today to buy a similar set. How many hours of work to buy a gallon of milk, a gallon of gas, an average sized car, an average home, a doctor’s visit, etc. Then you have to compare the differences in those items. The car for example has so many more features that it’s difficult to make a comparison. The… Read more »

mike
mike
10 years ago

@Mark #4: The writer was talking about lifetime income. I don’t know why you think the historical average inflation-adjusted income per hour is important. Or, if you’re saying inflation has been negative over the years, you’re wrong. But it actually looks like you’re confusing the two concepts in a way I can’t really make sense of.

ebyt
ebyt
10 years ago

Also have to consider gross vs. net income. I definitely do not take home what my salary says on paper. Sure would be nice…

Ah taxes..

Mark
Mark
10 years ago

@mike Sorry to confuse you. Try this on for size: Do you have more than your parents did at your age? I know I do. I have a bigger home (a smaller mortgage too), more paid off vehicles, a recreational vehicle, more electronic gizmos, dine out more often, take better vacations, etc. The author of this article took a year off to travel for Pete’s sake. Could the average person manage to do that back in the 60’s? I can personally attest that the answer is no — unless you were really wealthy. Our money goes so much further than… Read more »

DreamChaser57
DreamChaser57
10 years ago

I think incorporating inflation into this calculus makes it needlessly tedious. Tracking your lifetime income can be quite a useful exercise; it forces you to confront the reality that you have a lot more money than you think. I calculated my own and my husband’s lifetime incomes independently and our aggregate income starting the year we got married. I also record income fluctuations from year to year and take note of the reason for them, so if we have a particularly good year and it’s something we can easily replicate and it is not an anomaly – we can do… Read more »

chacha1
chacha1
10 years ago

“Where did all this money go??” LOL! I know exactly where mine has gone, and overall I’m pretty satisfied. There are certainly things I’ve “wasted” money on, but on the whole I’ve gotten a lot of bang for my bucks. The only years my income has gone down since I started working were years (consecutive, unfortunately!) when I took a voluntary pay cut to change jobs and when I was laid off. I think this is a great exercise for people who are thinking they may need to redirect. Interesting that Baker identified a tendency to redirect just when his… Read more »

zach
zach
10 years ago

and it’s Mark for the win!

Economics theory is slowly going insane. I had a class that tried to tell me that technology really doesn’t affect prices over the long term (Fisher’s hypothesis???). And also that the air we breath was government-provided…

I think it may be time to abandon theory in favor of reality.

Nicole
Nicole
10 years ago

Zach, Looking up Fisher’s hypothesis: http://en.wikipedia.org/wiki/Fisher_hypothesis it’s just the standard equation saying that nominal rates don’t mean anything until you take into account inflation. Real interest rates are the important thing. (And nominal interest rate = real interest rate + inflation) Oh… I think I see where your confusion is. No, they were telling you the OPPOSITE of what you thought they were telling you. Technological innovation– that is, productivity, is what changes real interest rates. Without increases in productivity we stagnate, even if there is inflation, our buying power does not change. You can have nominal money increase without… Read more »

Joe M
Joe M
10 years ago

Nice comments Mark!

Nicole
Nicole
10 years ago

p.s. Happy Birthday, Adam Baker!

Tim
Tim
10 years ago

“Where did all the money go?”

I cannot even say that it is the million dollar question. Coz I need to find out first how much money I squandered. LOL!

Seriously though, looking back and making an analysis of all my income and expenses, I am satisfied with where all of my money went so far. If they did not necessarily add to my net worth as a financial individual, they generally added to my net worth as an human individual.

SeekingLemonade
SeekingLemonade
10 years ago

“Where did all the money go?” seems like a way to make oneself depressed.

I’ll admit it has motivational use… as in “I’d better get my house in order and change my behavior.” But aside from that, it is not helpful to happiness.

It reminds me of an elderly person in hospice, with only a few weeks left to live, saying “Where did all the time go?”

RRD
RRD
10 years ago

I trust you are paying taxes and I’m not sure you are adding these into your equation, unless I missed something (which is entirely possible). But when you factor in taxes (federal, state, local and in some cases even more local), this is where a substantial amount of your money went.

Sarah
Sarah
10 years ago

I’m not sure how this is supposed to help. I mean, I can look at my annual salary and wonder where it all went, I don’t need to add up a lifetime to see that. Maybe if you’re in need of a shock, but people in need of a shock probably aren’t reading articles like this. I have clients on SSI who make $674/mo (this is what the government considers the least a disabled person can live on). Often when I help them fill out forms and they have to enter their annual income ($8088) they’ll say, “I got EIGHT… Read more »

CB
CB
10 years ago

Tallying up what one has brought in to date is the first exercise in the classic personal finance book “Your Money or Your Life”–it’s a starting point in the process of making the time you spend earning money reflect your values.

Shari
Shari
10 years ago

I often feel as if expenses are going up at a ridiculous rate and soon we won’t be able to afford to live….but then I look around me and get a reality check. We have 2 cars, a house, 2 computers, 3 TV’s, 2 gaming systems, and of course movies, CD’s and games to go with it all. We also have cable TV, high-speed internet, a landline, and a cell phone. All of these cost us money, and not all are essentials. (Maybe the phone, the house and the cars, but the rest are “extras”). My kids and myself all… Read more »

uncertain algorithm
uncertain algorithm
10 years ago

Mark’s comments are why I love economics: regardless of what happens to the money supply, as long as productivity and efficiency in technology increase (thank you engineers), our society grows and increases its standard of living.

Thus, if we want a higher standard of living, we just need to encourage more people to become engineers.

That last sentence was more of a joke than anything. Nonetheless, excellent point Mark.

mike
mike
10 years ago

@Mark: It’s nice that you feel that way, but you’re wrong. First, you think that the measures of inflation are “silly”, “little” and “ever-changing”. The various measures have been around for decades, and they tend to agree within fractions of a percentage point. There is little difference between inflation measures accused of being subjective (the CPI) and the most objective ones (the PCEPI, which is what the Fed has been using for almost two decades). They are backed up by painstaking research and reams of data. So I take offense when you accuse me of “youthful ignorance”. That’s an insult.… Read more »

another mike
another mike
10 years ago

I’m not the original mike who has been making comments, but I can’t help but agree with him. Mark neglected the fact that inflation-adjusted household incomes have increased since the 60’s primarily because the norm now is TWO working incomes – back then, the typical family unit only had one breadwinner. So although we may be able to get better toys nowadays, we’re sacraficing an at-home parent who raises the kids for the higher household incomes. My family is a single-income family with a stay-at-home parent, which is how my folks did it when I was a kid. I can… Read more »

Nicole
Nicole
10 years ago

Mike– Don’t say you’re going with the economists on something that economists don’t agree with. In health economics we ask the question a lot, “Would you pay 1950s prices for 1950s healthcare”? And generally the answer is “No.” You get a LOT more healthcare for a lot more money today, but that additional increase in life expectancy and health is totally worth it. Yes, some things cost more, some things cost less than they used to. On the whole, if you want the same thing you got in the past in the same quantities, it costs a bit less once… Read more »

mike
mike
10 years ago

@23

I understand that there are quality of life issues not addressed by inflation numbers. I’m confused why you’re bringing these up. What I’m saying is that the average prices that consumers pay have been going up, even when accounting for substitution and technology improvements. This is what economists measure when they talk about inflation. It’s incorrect to say that prices have gone down because we can buy some subset of typically lower-quality things for lower prices and because we have access to new technologies. Surely you agree with this.

Andrea > Self Employed Rates Blog
Andrea > Self Employed Rates Blog
10 years ago

My income goes up whenever I look at how to better value the contribution I make, whether that’s been to clients or to employers. I think a some people undervalue the work they do and that keeps them in lower income positions. Building up your self esteem and taking a good look at where you can add vaue can actually help with the income you bring in. Of course, that’s not to say that’s all that’s involved. But it truly does make a difference.

Nicole
Nicole
10 years ago

Mike– I don’t understand what you’re saying. Inflation is irrelevant– if the cost of everything doubles and your wage also doubles you have the same buying power that you did before. (It’s bad to have hyper inflation because sticker costs change too rapidly and hinder growth because people can’t set prices efficiently, and it’s good to have a little inflation because it means companies that need to can cut real wages without workers getting unhappy and less productive. Otherwise, inflation is irrelevant.) Inflation has nothing to do with real buying power or real wages. It has nothing to do with… Read more »

mike
mike
10 years ago

@27 We seem to have lost track of the conversation. I was talking about post #4, which claims (though not in these words) that the real value of the dollar, as described by inflation metrics, are not a correct way to estimate purchasing power of past dollars. This was in response to the blog post’s assertion that you can estimate past purchasing power with inflation metrics. I was saying that the blog post is correct and #4 is wrong. While I’m at it, I might as well add real dollars are defined such that some price index (say the CPI)… Read more »

tom
tom
10 years ago

I have to agree with Mark on this. Economist Thomas Sowell does to, and explains this issue well in his book Basic Economics (the book won’t help you with personal finance, but it is a good read) – to summerize some points: If your REAL dollars could buy a Chevy in 1970, but not today, the issue isn’t simply inflation. A Chevy today has more features than a 1970 Cadillac. You wouldn’t blame inflation if you bought a new Chevy every year and this year you bought a Cadillac. The concept of REAL dollars are meaningless, especially over long periods… Read more »

Mark
Mark
10 years ago

@mike I AM an economist. I have a BS in Economics from Virgina and a PhD in Economic Theory from Stanford. Trust me, the way inflation is calculated today has no resemblance to the 90’s, the 80’s or the 70’s. Inflation is 100% government induced and is designed to allow governments and businesses to repay debt with lower value future monies. You’ve come to a gun fight armed with a knife, son. Try doing a little research and reading The Choice by Russell Roberts. It’s an easy to understand book written by another PhD economist from George Mason University. It’s… Read more »

Nicole
Nicole
10 years ago

@mike– also a PhD economist, other coast… did not care much for my macro classes, but one of my advisers did write a prominent paper on CPI bias (and no, they don’t use the same basket that they did 80 years go… and there are several other measures of inflation besides CPI) and I did pay attention in macro when it had to do with labor (which is why I think the most important use of moderate levels inflation is to keep the worker happy thinking he’s getting a raise/no paycut even if his productivity isn’t increasing enough to merit… Read more »

shares