For primary or joint income providers in a family, paychecks are a big deal. Or perhaps I should say direct deposits, I’m not sure anyone still gets a physical paycheck anymore. Being me, I had to interrupt this post and find out. Kind of surprising, it appears 93% of workers are paid via direct deposit now. I do still get pay checks for my consulting gigs, but most everyone with a 9 to 5 just has money show up twice a month into their bank account. And that is still a big deal because that’s the money that fuels their daily lives. Since this post is becoming a stream of consciousness thing today, I interrupt the post for a second time, this time to tell an anecdote from my past.
I started work way back in the last century and at that time just about everyone people was given paper paychecks. We actually had a guy who walked around every two weeks and handed each of us an envelope with our check in it. And that wasn’t unusual, in fact it was the norm. And I remember when that changed. First, we offered employees direct deposit or a check, their choice. The incentive however was that the deposit would show up at least one day earlier than the paycheck. We thought everyone would jump at that, but some workers declined and asked to keep getting the envelope handed to them. Eventually it became a hassle to maintain two separate systems so we insisted that the only way to get paid was direct deposit. And there was an uproar over it! Why, you might ask? Well, thanks for asking, it turns out a few employees were cashing the paychecks and secreting some of the money in another account or a cubbyhole unbeknownst to their significant other. This left their spouse thinking their income was significantly lower than it really was. With direct deposit the veil of secrecy was lifted and the hypocrisy was exposed. I’m not sure if there were any divorces over this change in payroll practices but the consensus opinion was it factored into several of them.
That has nothing to do with this post but it’s a great story and I don’t get many chances to tell it. This post is about how your perception of your pay changes as you change and as your net worth changes. We all talk about the time value of money a lot. How ten dollars today is worth much more than ten dollars ten years from now because inflation will eat away at its purchasing power. But there is a whole other kind of the time value of money too. And it is one I’m only now beginning to understand.
Initially, when you are fresh out of school you are leaving a very controlled environment where money was fairly hard to come by. You lived in a dorm or an apartment with roommates or at home where you didn’t need much money. But with your first real job (not the barista gig you took until you could find a real job) came a real paycheck, OK, a real direct deposit. Real money anyway, more than you had ever experienced assuming you aren’t a trust fund baby. Immediately you noticed two things. You noticed that you earned a lot of money! And you also noticed that FICA, Medicare and the IRS had already grabbed an overly large chunk of it away before you even got to touch it. At least I did when I got that first paper check, because all the thievery was documented on the stub attached to the check.
You noticed a third thing a couple of weeks later, and that was that even though you had just gotten a bigger chunk of money than ever before in your life, that by the time the second payday got there you were out of money! And that’s when it hit you how expensive life really is.
After a while, you were grooved in on the whole income and expenses thing, and if you were fortunate to earn good pay and disciplined enough to spend less than you earned, you started making some progress and increasing your net worth. You likely had to clear some debt for that new car you just had to have and for those student loans. But eventually you became smart with your money and started paying off your debts, building an emergency fund and investing for retirement.
As time went on the dual pressures of inflation and career advancement increased your pay. As you looked back on your starting salary it began to seem like you started out barely at minimum wage, even though at the time you felt you were making bank. And as you progressed in your financial journey you became debt free, or at least free of the bad kind of debt. You might well have some business or real estate debt on cash flowing properties but you are past the credit card debt, high interest car payments and have finally retired those student loans. You might have a crazy low interest or even zero interest car loan, because, why not? But you aren’t spending a huge part of your budget on cars you can’t afford, because you are smarter than that. Pretty soon you find you have a net worth of six figures, something you couldn’t have imagined when you got that first payday.
If you are very lucky, as I was, or very skilled, as others I have known were, then you’ll see your income continue to increase. In my case, as improbable as it would seem for someone almost terminally lazy, my income went from my starting rate to twenty-four times that amount. Admittedly some of that was due to crazy inflation during my early career, and it would be very hard to match that kind of geometric increase in this low inflationary era we are in. But still you can think back to when you were making only half what you now make. And you feel some pride for having grown your income that much. And if you’re the smart one who has saved and invested 20% or more of your gross income all along the way, your net worth may be approaching seven figures. It surprises you that it took forever to hit a six figure net worth but that it seemed to take less time to increase that to seven figures.
If you enjoy what you are doing in your 9 to 5 you may just choose to continue to work full time and not retire yet. Then you’ll really be surprised as you add another million to your first, seemingly in a fairly short time. And if you get an inheritance along the way like I did you could add yet another million overnight. At some point you will retire at least slightly early from full time work. But you will still earn some money because you like having productive things to do and you think, “why not get paid to do them part time?” Five years of that semi-retired life and you may add yet another million to your net worth without even trying. And at that point, which is the point at which I exist today, you’ll see earned income in a totally different way than you ever have before. You will see it is meaningless.
I can only use me as an example because I have my own data and I don’t have yours. But here is what I see when I open my Personal Capital app on my phone. A disclaimer here, Personal Capital doesn’t pay me anything, nobody does, because I don’t do ads or affiliate links. But they do manage some of my money and I do like their free app as a way of aggregating the 18 different financial accounts I have into one simple dashboard. Right at the top of the screen, directly under my Net Worth total is a number in green type. It is the amount my net worth has changed in the last 365 days. This morning it showed $1,032,113. That means my net worth changed by over a million dollars to the good side in the last year. That equates to $86,000 per month of new investments. My part time consulting income is far less than that, maybe $8,000 in a good month. When what I own increases by $86,000 dollars a month what difference does earning $8,000 dollars a month really make? It simply doesn’t move the needle in comparison. Today, for instance I deposited four checks from consulting clients into our checking account. The total was $5,328. The same app tells me that my net worth dropped $15,000 since yesterday. I earned what would have seemed like a fortune to younger me but still lost ground to the tune of nearly ten thousand dollars, in one day, for nearly a months work? That’s not very motivational.
There is always some kind of truth in numbers but it can be a little hard to discern. Am I making $86,000 a month like my app tells me or did I just lose ten thousand dollars in one day in spite of earning what it used to take me several months of work to earn? Did the $5,328 I earned even matter? The numbers tell me that by the time you get to be the owner of a few million dollars, then what you earn makes zero difference in what you can afford to spend. It also tells me there is no reason to prioritize work that pays from volunteer work that doesn’t. It tells me my priority should be on work that matters to me. Which is why I’m retiring from paid consulting this month. It isn’t that much fun and the cash is about as useful as Monopoly money to me.
I have to admit that I began to start noticing this several years ago and that it took much of the fun out of my career the last couple of years of my 9 to 5. That’s when I began to seriously consider retiring. I had already added an inheritance to my substantial investments and even though I was earning a high salary it wasn’t having much impact on my ability to fund my family’s life. Realizing this I was able to take my pay out of the equation and simply weigh the satisfaction of work against the hassle, and work was found wanting. Up until that time pay weighed heavily on my decision, so I kept working, but once it stopped mattering the choice was obvious.
I can still remember my very first paycheck and the elation I felt when I looked at that impossibly large amount of money. It was so exciting! And now, my net worth sometimes swings by more in a single day than I made in gross pay that entire first year of work! And when it does, on a volatile market day, it seems inconsequential. Making or losing $50,000 on a digital screen doesn’t impact my life. Imagine if a whole year’s pay meant nothing to you. And then realize that will prove to be true at some point in your future, just as it has for me.
If there is another lesson here it probably is that we should stop and reframe money from time to time. We are all creatures bound to the past. Those past numbers still carry weight they do not deserve, decades later. My pay and expenses were low when I first started yet those values are burned into my mind. I still look at twenty dollars like it is a lot of money when compared to current prices and to my ability to spend, it is nothing, it is small change. You are gradually and assuredly becoming the same as me, some of your financial anchor points from your past probably aren’t relevant anymore. And if that isn’t the case now, it will be in the future. Don’t make life and financial decisions based on what money used to mean to you. Reset what a dollar means to your current financial condition. It might help you retire a little earlier. It might make spending more money make more sense, instead of ending up the richest guy in the cemetery.
What about you, can you remember when what now seems like a small amount of money seemed enormous?
Have you ever let an outdated value of money steer you into making a bad decision or delaying a good one?
Is this just a problem for fossils like me or does your financial past still impact your current financial decisions more than it should?
