Life in the modern-day world has confused some of us when it comes to how we view our financial value.
We often measure our worth by the physical possessions we currently own and gauge our progress on the additional possessions we successfully obtain as we go through life. Examples of these might be:
- owning a nice car
- having the best house and yard in the neighborhood
- having the latest fashion or technology
However, when we heavily weigh our financial value on our possessions, our minds can become so unnecessarily preoccupied with obtaining them that we are distracted from the bigger picture.
For example, a twenty-five-year-old may be unnecessarily envious of a forty-year-old driving past in the latest Mercedes Benz, forgetting that the other person has lived and worked fifteen years longer to be able to afford the flashy car in the first place. Besides which, that coveted Mercedes Benz actually lost value the minute it was bought and driven out of the showroom. Although our physical possessions are a piece of our current worth, they do not always hold the bewitching value we place upon them.
There is an important difference between the stuff you own versus the value of your income potential, also known as your earning power. To put this into perspective let’s examine two scenarios:
Scenario One
Picture yourself unemployed at thirty years old, and you have just won the lottery for one million dollars. Most people would feel like they’re now rich and would probably forgo the job hunt because they think they have it made. And, perhaps for the near future, it’s true that they will not want or need for anything. But that will only last as long as the money does; it will run out sooner than later.
Granted, those savvy enough to invest the money might be okay, but, without additional money coming in apart from the one million dollars, it will only take a spend of thirty thousand per year for your money to be gone by retirement. Even the most frugal of individuals would struggle to make the one million last past retirement with the cost of living alone, and that’s before even considering the unnecessary possessions we might also desire and acquire.
Scenario Two
Now, picture yourself at thirty years old again, but this time you’re making sixty thousand per year and starting with zero dollars in your bank account. All it would take for you to become a millionaire by the time you retire is to save half of your income – thirty thousand per year for thirty-five years works out to be $1,050,000 by the age of sixty-five, which actually works out to be more valuable to you in the long run than winning the lottery for a million dollars with no other income.
Through your earning power, all things are possible. If you have a succession plan in place and minimize the number of unnecessary items you purchase (thereby saving yourself the associated expenses), you’ll leave yourself in a better position to maximize your income potential. After all, it’s not about what you spend, it’s about what you keep.
The Solution
Anything you acquire in life financially still needs to be maintained or preserved. Maximizing your income potential is a way to ensure longevity and can be done through savings, or by purchasing things that appreciate in value (unlike the Mercedes Benz in the previous example). Investing is a great choice but requires a certain level of knowledge to make the right investment decisions. Another good option is to purchase life insurance plans, which enable you to use your current earning power to create wealth for the generation that comes after you, or to mitigate financial risk for your loved ones should you die unexpectedly. Your pension is another route as this will also appreciate in value as time passes; once it matures at retirement, you get out more than what you initially put in.
At the end of the day, your income potential is by far one of the greatest assets you have. Without it, you cannot do anything. You cannot buy that dream house or car or position your family in that dream situation. You cannot take out those life insurance policies or start that investment plan to secure funds for higher education. You cannot maintain the payments that come with your new mortgage, or the insurance on that new car you just bought. That said, there is nothing wrong with treating yourself or having the finer things in life if doing so is sustainable.
By focusing on your income potential, or your ability to earn, and having the right succession plan in place, you lay the foundation for all things to be possible. Since joining the industry, I have made it my mission to ensure the people of my community understand these things and have everything they need to create success for themselves and the people they love. Here at Freisenbruch we have everything you need to build a sound financial plan to help maintain the life you have created or create the life you want to live. The future belongs to those who prepare for it today!