Personal Finance 101: Your Most Valuable Asset

When it comes to personal finances, most financial advisors focus on the saving and investing side of the equation. There is no doubt that this is very important. 

You should definitely have a plan in place to save 10% or more of your income. And it’s also important to take a long-term approach to investing that enables you to capture the superior returns that result when investors are willing to ride out the short-term ups and downs of the market. (For related reading, see: 5 Strategies to Avoid Outliving Your Money.)

In addition to these principles, when you’re looking to take charge of your personal finances it’s also critical to think holistically about yourself and your career.

I Love Math!

You’ve heard the expression, “If all you have is a hammer, then everything looks like a nail,” right? If you’re a financial guy like me and think about numbers all day, every issue in life looks like a math problem after a while. The finances behind your career and future earning potential are no different.

Let’s look at a hypothetical situation:

  • You are currently earning $75,000
  • Your overall tax burden (federal, state and local) is 33%.
  • This leaves you with about $50,000 a year in take-home pay.
  • Inflation and your salary both increase by 3% every year.
  • You plan to work full-time through age 70.

Now let’s look at seven theoretical workers ranging in age from 25 to 55. If we apply this math through an assumed retirement age of 70, here’s where things land in terms of both a final salary and a total future after-tax earning potential through age 70:

Starting Age

Final After-Tax Salary at Age 70

Future After-Tax Earning Potential

25

$189,000

$4.8 million

30

$163,000

$3.9 million

35

$141,000

$3.2 million

40

$121,000

$2.5 million

45

$105,000

$1.9 million

50

$90,000

$1.4 million

55

$78,000

$1.0 million

I don’t know of many 25-year-olds who have $4.8 million in the bank––and let’s face it, most 40-year-olds haven’t amassed $2.5 million either! Thus, it’s clear that in most cases, you are your most important asset in terms of managing your long-term personal finances and your future earnings potential. (For related reading, see: 5 Financial Strategies to Last a Lifetime.)

Here are some choices I’ve made to protect and focus on myself in the context of my personal finances that you can consider.

Choice 1: Take Care of the Machinery

Both exercise and diet are critical components of your long-term health. There is no “one size fits all” approach to these, but putting forth some effort in each is important.

Most mornings I start out with about an hour of exercise. Although I admire the people who do things like triathlons, you don’t need to kill yourself to get great benefits from exercise. I do enough walking, running, lifting and yoga to get my heart rate up a little bit and feel awake and refreshed to start my day.

On most Saturdays when the weather is warm, you’ll find Stacy and I at the Easton Farmers Market, which holds the distinction of being America’s oldest continuously operating open-air farmers market. Locally raised produce and meats make up the vast majority of our diet and we’ve said goodbye to almost all sources of sugar and processed food. 

When you take care of your body, you show up for work with more energy and it will show in the productivity and creativity you bring to each task!

Choice 2: Make Yourself Indispensable

This may seem like a tall order, particularly if you’re early in your career. Here’s a gauge to see where you are on this. 

If you think about all your coworkers, at least half of them should be able to say, “Thank goodness [INSERT YOUR NAME] is here because……” and then sing your praises about one or more things that would absolutely fall apart if you weren’t around. (For related reading, see: 5 Thing to Know About Managing Your Career.)

If this is true for you, great! And if not, see Choice #3, for what to do about it.

Choice 3: Focus Upon Your Unique Ability

Your unique ability is a very small set of tasks that you do better than almost everyone else and that you would do for free all day long because you love doing them so much. Once you have your unique ability defined, focus more and more of your daily effort on those tasks and figure out how to delegate or shed the other things that you struggle with and that quickly drain your motivation.

If you feel like you have the latitude within your current job to shape the focus of your work, press on! And if not, it may be time to update the resume and seek out work that’s more in alignment with the tasks that allow you to create the most value.

Choice 4: Boost Your Income

There are a number of levers to pull here. I do not recommend simply working longer or harder to earn extra money. I have never chosen to work more than 50 hours in a week for an extended period of time because that’s what’s important to me from a work-life balance standpoint.

Instead, focus on identifying those few important tasks that add the most value to either your employer or your business and over a period of months or years, this focus will always be rewarded.

It is also more possible than ever to open a side business while working full time. For example, I’ve been operating Rowan Financial for years now on a part-time basis. You’ll find that if you’re focused on work you love, the extra effort will come easily to you! Remember, we’re not talking about doubling your income overnight. An increase of 1% or 2% a year beyond inflation can make a huge difference over a career. 

Going back to our previous example, let’s look at the lifetime earnings potential for our seven workers and compare what happens when they get a 3% per year raise versus a 5% per year increase:

Starting Age

Lifetime Earnings With 3% Raise Per Year

Lifetime Earnings With 5% Raise Per Year

25

$4.8 million

$8.4 million

30

$3.9 million

$6.4 million

35

$3.2 million

$4.8 million

40

$2.5 million

$3.5 million

45

$1.9 million

$2.6 million

50

$1.4 million

$1.8 million

55

$1.0 million

$1.2 million

Think about that – with a 5% raise, you could take a ten-year vacation from age 25 to 35 and still earn the same $4.8 million that someone starting at 25 makes with a 3% annual raise. Amazing.

Your Assignment:

When you’re thinking about taking charge of your personal finances, always remember that you are the most important part of the equation. Pick at least one of the four focus areas listed above and put plans in place that add to your future earning potential. This can be as simple as shifting your focus on health and well-being, or taking those first few steps toward opening the business you’ve always dreamed about. Good luck with whichever path you follow. (For related reading, see: A Household Spending Plan to Save for Retirement.)