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?
>>Don’t make life and financial decisions based on what money used to mean to you.
This is a really great post, Steve. I’m dealing with a lot of this right now with some purchasing decisions. This post helped clarify my thinking, and your line above is at the root of it. Thanks.
Thanks, Hobo, it is an easy problem to point out, but like most matters of emotion it is easier to recognize it than it is to fix it!
“What about you, can you remember when what now seems like a small amount of money seemed enormous?”
I used to travel a lot for work and dreaded housecleaning on weekends for at least 3+ hours and then yardwork. Then, I would be too tired to do things I enjoy in the outdoors such as hiking, mountain biking, stand up paddling, etc. About 12 years ago, I really struggled mentally if I should pay ~ $100/month for housecleaning and $100/month for lawn services when I can do it myself and save $2K-$3K per year. I decided to pay for those services and really enjoyed getting my free time back. It was the best money that I spent. This January, I retired early and again, mentally struggled with continuing to pay for those services when I have all the time in the world to do them. I looked at the total costs of these convenient lifestyle inflationary services versus my net worth. The math was always easy as it is now. No brainer. The value of a padded retirement nest egg is that has the luxury of asking “Does it serve me well in terms of happiness?”. Answer: A big YES!!!! 🙂
See, you are the smart one as usual Denver! Those are perfect examples.
Good stuff Steve. I experienced the same feeling of Monopoly money about 5 years ago when my NW reached a certain level. Just numbers on a screen, or on a spreadsheet in my case. It’s especially easy to detach from it after you’ve mastered the skill of not fretting over market declines, which we obviously have. Of course that’s one of the major skills necessary to even get to a big net worth, so I guess that’s a chicken-egg thing.
Dave, I agree that not worrying about volatility probably is part of the toolset that got financially independent people to that place. To me learning to let go of some of that money on things that would have been unwise luxuries in the past is harder. But we are getting better at it.
I’m not in the major leagues, like you, in terms of the dollar value of daily nonwork-related net worth swings. Instead, I’m in AA ball, with AAA ball in the not-too-distant future. But my mental state from my financial past is still somewhat hardwired into me and impacts my current financial decisions more than I know, intellectually, it should. That’s a mindset I’m slowly, but surely, trying to change.
Hey, I wasn’t there for most of my life either, but you are definitely on your way. I think it is a lifetime battle of sorts to reframe all sorts of things based on our changing realities. But it probably has a silver lining, by encouraging more frugality than is necessary. That’s not all bad.
you make a great point, steve, about resetting some of these values. i’ve watched the same market swings in one day of the amount i now make in a year. that doesn’t bother me. but mrs. smidlap recently came home with an “artisan” pot pie and “artisan” loaf of fancy bread. they were really expensive based on my former level and i really don’t see the value proposition. you know what though? i gotta remember it is not all about my perception and meaningless in the grand scheme. plus – she wanted it those things i guess. it’s not like she went out and bought a new BMW or something. it was 30 bucks.
The problem with your comments, Freddy, is they are always better than my posts! That’s such a great example, and it points out the craziness we generally have trained ourselves into by the time we are on top of our financial situation. You and I aren’t impossibly rich but the idea that $30 is really significant in terms of whether we will be able to keep the lights on or eat decently ten years from now, that’s just preposterous. Yet it feels like a big deal any time we see money going out for little perceived value in return.
Right around ten years ago, I went to visit my girlfriend at her apartment and found her crying in the kitchen. She got a $35 parking ticket, and that money was absolutely devastating to a poor student trying to get through grad school. Ten years later, we’ve crossed the 7-figure threshold and a daily market swing could change our net worth by 1000x that parking ticket. The perspective definitely changes over time, but it’s not always easy to let go of a former frame of mind. She would still be furious over a $35 parking ticket today, but she probably wouldn’t cry. Nice post Steve. Oh, and as of the last time I checked, one of our facilities still hands out paper checks every other Friday, for those who want to get paid that way.
Hey Adam, that’s interesting that there still are some tangible paychecks out there. Really I think that always should be an option. There are unbanked people out there and that shouldn’t be a condition of employment. You’ve done amazing work in ten years, I sort of plodded my way through a career almost four times that long! Our emotions are a powerful force, the logic that your net worth swing in one day equals one thousand parking tickets is unassailable, but our hearts still feel pain where logic says it shouldn’t exist.
That’s one of the most interesting stories I’ve heard of, the one about paper checks. I had no idea you could use that to hide some money from your spouse. I mean, direct deposit lets you deposit money to not just one to but multiple accounts so I’m not sure what the thinking was there, haha.
David, I never thought about that, I guess a clever/evil worker could still bamboozle their partner that way. But it was a real thing and that was in the day where the dominant earner was almost always a man and the person being mislead was almost always a woman. We had some crazy things. One was when a worker died and three women showed up to inherit his 401K. They were all married to him and had no knowledge of the other two. The first marriage won the day because there was no legal divorce. The other two were not legal marriages to the surprise of the “spouses”. We all said it was a good thing the guy was dead because those two spurned “spouses” surely would have handed him a fate far worse than mere death.
LOL seriously?! How does someone become married to three women without any knowing about the other? That takes so much planning, willpower, and the ability to switch personas and ego.
Phenomenal stories.
I wouldn’t have believed it if I hadn’t been on the committee managing the plan!
I remember growing up working for hours to make $5. Now I seem to waste that by just looking at Amazon. Thanks for the great story!
My first paid job was throwing newspapers for my older brother for one dollar a day. I think that was child abuse but he maintains he paid me all he could afford!
You’re right, it’s hard to change that mindset! We’re about to move, and this will be the first time that we’ve agreed to essentially “throw money” at things like cleaning, patching and repainting walls, and getting things fixed — all things we would have previously spent weekends doing ourselves. At this point, it just makes more sense in light of our financial position and limited time. But it’s still painful to see the dollar signs because the super-frugal mentality that got us here still rules most of our thinking. I’m okay with that though. I don’t want to lose that feeling of taking a deep breath before paying someone $500 to do something I could do myself, even if I still fork over the money. It keeps me in check.
Mrs. FCB I do not think you’ll ever have to worry about becoming an over-spender. You are kind of the gold standard of common sense and self control. But it is funny that even when you know it makes perfect sense to spend more than the younger you could have justified, it still has this kind of off center feel to it. I agree it is a good problem to have, we are forever creatures of what got us here.
My first job out of college as a Chemist paid $21,200. I signed up for direct deposit right away, but not the 401k. The 5% contribution was not worth it in 1985 for me and decided to start buying up Reebok and Nike stocks during the aerobics craze instead. (Damn, I wish I would have kept those stocks longer than I had).
This quote strikes chord with me: “I still look at twenty dollars like it is a lot of money when compared to current prices and to my ability to spend,”
I don’t want more stuff and have been selling bits of pieces that I collected over the years on eBay every month. When I get $20 for set of match box or hot wheels cars, I’m thrilled. More so, knowing that they are going to another person who will be more thrilled to have them,
Great comment Francis, in the same way that spending a now small amount of money causes a disproportionate feeling of loss, making a small sum of money feels like a big deal! I was the same way about my consulting expense report. When I charged $40 on take out because I was on an out of town work trip I felt like I was winning a small lottery, which is kind of crazy because $40 isn’t that much cash to me now.
As always Steve—a thoughtful post.. I retired at 55 a year ago after my lovely partner reminded me that we had sailed past our “eff-U” number and that we had made plans we needed to keep. It is so easy to work another year, accumulate another few $$, you know, ‘just to be on the safe side.’ I officially left my job the week the pandemic hit and yet here we are a year later with more $$ after a year of living without a paycheck than we had when I left work…. it is a cliche’ but life is short….
Thanks Jack, that’s nice of you to say. Good on you for getting out at the right time, life indeed is short. I also feel like I left at the right time even though I was 60. The last five years of only barely working a little now and then have been awesome! And having the right partner is priceless.
These words really resonated with me, “We are all creatures bound to the past. Those past numbers still carry weight they do not deserve, decades later.” Good insight.
I got a couple things I think you’ll get a kick out of. I’m 39, so I think you’re somewhere around 20+ years ahead of me. At my first megacorp job in 2006, we had a person that would take around that cart and hand out paychecks. A year or two later, if you had direct deposit, they would still hand you the same paystub but with a void. It took them awhile before they phased out handing those papers out. So you’re not so old as you think! Hahaha.
I also remember the day my little brother got his first paycheck and asked where all his money went. I told him taxes and he couldn’t believe it. It cracked me up seeing someone experience that for the first time.
Great post and perspective bud. I really enjoyed reading this one and soaking it in.
Q, you know I forgot completely that we did the same thing. Even after direct deposit we handed out stubs at first and then mailed them later. Totally forgot that. And yeah, my older brother did the same thing to me when I first saw Uncle Sam had lifted a hefty sum from my pay. I’m actually 25 years ahead of you, but still don’t feel quite irrelevant and its an honor to have younger friends such as you who consider my opinions worth reading. One thing about this community I really enjoy is the fact that I can communicate across generations. Most of my career my favorite thing was working with people much older and much younger than me, there is so much to learn from both!