Your Money or Your Life: Step 1 – Making Peace With The Past

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YMOYLThis is the fifth part of The Simple Dollar Book Club reading of Your Money or Your Life. Want to know more?

Each chapter in Your Money or Your Life finishes up with a project of some sort that illustrates a point about one’s personal finances. Most of these seem rather pointless at first, but once you actually move through the exercise, it almost always ends up being a real eye opener.

The exercise here in this first chapter is no different. It breaks down into two parts.

Find out how much money you have earned in your lifetime – the sum total of your gross income, from the first penny you ever earned to your most recent paycheck. I read this at first and shrugged it off, thinking to myself that there really wasn’t much of a point to it. Well, there is – and it’s a big one. Actually sit down and total it up using old tax returns and such. Look at that number for a bit, then move on to the other half.

Calculate your net worth. This is a much more common calculation, one that everyone should do once in a while to look at their current financial state.

What’s often really shocking is when you compare everything you’ve ever made to your current net worth and ask yourself where did all that money go? It’s a question that, if you begin to ponder it, really makes you question your wasteful spending habits. The thing is, it doesn’t matter how frugal and careful you are, you’re going to still have a fairly low percentage here – what’s scary, though, is that some people will have made significant money in their life and yet still have a very low (even negative) net worth.

Five Questions From Chapter 1
As this step ended the first chapter, I thought I’d summarize the five questions that the first chapter put into my mind that really made me think about the relationship between my money and my life. Hopefully, they’ll give you something to reflect on as well.

1. Does the argument of simple living for the greater good of the world have any weight? I find that it does for me personally, but it’s easy to see how this factor wouldn’t matter to others. It’s interesting to think of the day-to-day choices we make in the context of a global perspective, but is that realization enough to bring about behavior change – or is it just easier to write it off as “I’m one person, what difference does it make?”

2. When I buy something, do I buy it just as a “balm” for some greater issue? Take my Nintendo Wii, for example. Did I buy that to cover up some sort of greater issue in my life? I used to buy things as a balm quite often, but once I started spending serious time reflecting on my purchases, buying as a “balm” became much less of a factor.

3. What aspects of my life are cluttered, and how can I de-clutter them? I’ve really been focused on cleaning out my physical, temporal, and social clutter over the last few years, yet there are still aspects of my life that I feel could be better. I find I’m happiest, for instance, when I stick with GTD and don’t let it slide because I’ve been successful at cleaning my plate.

4. Does my professional life leave me unfulfilled? It doesn’t. If it did, I think I would have resigned from the job once I found other sources of income from my side businesses. However, I know a lot of people whose job leaves them feeling completely empty at the end of the day – is that really a life worth living? For some, it may seem like there’s not a choice in the matter – but is that lack of a choice actually just framed by consumerism?

5. What does it really mean to realize that I’ve only retained about 4% of what I’ve earned in my lifetime? I found that percentage very upsetting when I first calculated it and it made me question a lot about my choices, both past and present. If you tried this calculation, did it upset you as well?

Tomorrow, we’ll jump onwards into the second chapter, “Money Ain’t What It Used To Be – And Never Was,” focusing on the first half of the chapter up to the start of “Step 2.” That section is on pages 40 through 59 in my paperback version of the book.

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12 thoughts on “Your Money or Your Life: Step 1 – Making Peace With The Past

  1. I don’t know if the ratio of total earnings to net worth means much. When we die, the ratio should ideally be about zero, or just slightly above zero so that we can pay for our burial and leave something for the kids, but other than that the purpose of money isn’t for wealth accumulation, its for spending and giving. All that matters is that you have enough for a safety net and for retirement.

  2. There’s a companion book to Your Money or Your Life called Getting a Life which shows lots of examples of people following this book. I really love seeing what shocks different people when they do these exercises.

    The first time I calculated my net worth, I was shocked and pleased that it was positive!

    To calculate my total income, I just used the earnings record sent to me by the Social Security Administration. They automatically send this to Americans every year after a certain age (35?). This underestimates my income (doesn’t show babysitting as a kid or allowances, etc.) but it’s a closer estimate than I would have gotten myself. What shocked me is how my income has changed over the years.

    The first decade my income ranged from $579 to $6701, averaging $3,158. Low, huh? I was in college or grad school or job hunting with part-time jobs. (Note that this doesn’t include any grants or student loans or government subsidization–I wasn’t really living off this amount!)

    The second decade my income ranged from 14,888 to 24,430 with an average of 18,950. That’s a huge jump, eh?

    I’m only eight years into my third decade, and my income has ranged from 28,395 to about 39,000 with an average of about $33,312. Another huge jump! This is when I switched from being a secretary to being a researcher and then a glorified secretary.

    I’m actually hunting for a job in a new field right now–the superstitious part of me says another mysterious jump in pay is due in two years!

    The comparison between what you’ve earned and what you have can change quite a bit over time. For example as a little kid, you probably have a higher net worth (if you add up all your toys and furniture) than your total income (if you add up all your allowance)! Also as you age and start earning interest and capital gains in retirement funds (which I think don’t count as income for this exercise) you can approach and exceed your total earnings.

    I’ve earned around $485,000 and have a net worth of around $242,500.

    I do feel kind of bad that I’ve earned almost half a million, but if I wanted to retire right now (which I do), I’d have to figure out how to live on $650 a month. (Street person with no health insurance! I can do it! Hmm, guess I’d rather work some more.)

    I feel like my salary has been so large this last decade (relatively speaking) that I really should have been able to make more progress. I mean, I paid off my student loans, started my retirement fund, and bought my house during the middle decade, and what have I done since then? Well, I’ve maxed out my IRA and upped my donations to 10% and started letting myself go to more live performances and a few other pricy cool things, but I still feel somehow that some of the money might be slipping away.

    Inflation may be the other part of the explanation. I remember when I used to think $20,000 was a great income that I could easily live off of. But I no longer think that’s true (so long as I still have house payments). Since 1996, the year before I broke $20,000, an inflation rate of 3% would mean I need $27,500 today to have the same amount of spending power. But I’m now making $40,000, so I should feel a lot richer than I feel, eh?

  3. Debbie M: seems like you’re doing pretty well if your networth is $242,500 on an income of $40K/year.

    A quick tally shows my networth to be around $350K, the biggest component of which is my house which was paid off about 7 years ago. I make about $85K/year now, but there were a few years earlier in this decade when I was in grad school and my income was as low as $3K one year (2003 – the depths of the tech depression).

    What’s most surprising to me is that I’ve been putting money into IRAs & 401Ks since about 1985 (when I got my first out-of-college job) and I only have about $110K to show for it. You hear all this talk about how if you start saving early for retirement you’ll end up with this huge amount of money by the time you retire. Well I’m 22years into it and I’ve only got about $110K. Granted, there were a few years there in the 90′s when I was focusing on paying off the house and didn’t contribute much to the 401K and when I was in grad school I couldn’t afford to contribute at all for a few years, but still, I kind of think this whole thing about the average returns for longterm investing being in the 8 to 10% range are a bit bogus – I’d have to say that in my experience it’s been much lower than that. It seems that the downturn in the market that lasted from 2001 to about 2004 is still noticable in my retirement accounts. In fact, if I recall correctly, I had about the same amount of money in my retirement accounts back in 2000 as I have now.

  4. Why calculate it on *gross* income? The taxman takes close to 50% of that figure. Also, for most people interest payments/carrying charges are a necessary evil to build equity/wealth. I think doing the homework and calculating discretionary spending vs. *net* income is a better indicator of how lifestyle choices impact our new worth.

  5. “What’s often really shocking is when you compare everything you’ve ever made to your current net worth and ask yourself where did all that money go?”

    Age 45, white, bachelor’s degree completed in 1986 after 6 years in college, married no kids, nonworking spouse, and it looks like I’ve retained at least 25% of my earnings (depends on the market value one assigns to the house that’s not paid for). 13 years to go on 15 year fixed mortgage that’s below 5%, so not trying to pay it off early.

    Some fun research for y’all can be found by looking at historical median and average incomes depending on household size: http://www.census.gov/hhes/www/income/histinc/incfamdet.html

    I’m well above the national median for family income, yet just below the median for a white educated family (presumably because my wife doesn’t work).

    Our only debt is the mortgage and has been that way since buying my first house in ’97. Wife’s economic contribution is to run the evergrowing list of errands for our aged parents. We’re sorta wondering how we’re going to manage when we get over age 80-85 since we have no children to do the errands!

  6. The summary at the end of Chapter 1 is great. It’s essentially:

    You made a decent amount of money. What do you have to show for it?

    I’d add another side:

    You’ve lived how many years? What do you have to show for it?

  7. Oh yeah, I wish the authors added a caveat that health problems can devastate your net worth. That’s not everyone, but you may have nothing to show for your years of life if you just spent it all battling cancer.

  8. When I first read this chapter months ago I didn’t even consider taking the time to calculate all of the money I have made (seems like a lot of work and I doubt I can really capture it all). After reading the chapter again yesterday, I still didn’t really want to take the time to do it…but after reading this post and thinking about how I really want to take the book seriously this time, I decided that I will take some time and do the best I can to figure it out this weekend.

    Fortunately, I just got a social security statement in the mail this week so that should get me started.

  9. Okay, I already knew this – my net worth in cash value is about 1.5% of my career earnings but I am semi-retired and have been most of my life. After three years of college, I took off for a year of surfing. After finishing grad school and teaching seven years, I took a year off to live in Santa Barbara and write and play volleyball at East Beach. Every six years from that point, I took a leave or a sabbatical until I officially retired from that career at the age of 53. After my first seven years of teaching year round, I decided to take every summer off. I played competitive beach volleyball, and surfed and watched a hell of a lot of sunsets. I hitchhiked around the country. I rode a beach cruiser bike every where except when I went dancing. Oh yeah, I founded a dance studio and made that rather relaxing hobby my work. I travelled the competitive dance circuit. And now I have a low personal net worth but I have spent my life living on less. My current bike, I bought it new in 1983. I own my business but only work about 10 hours a month at it. And finally, over the last 13 years, I’ve partnered with a great person and together our net worth is quite a bit more than my individual one.

    And I needed to write the above to get my balance back after doing all the calculating. Whew!

  10. My net worth is about 8% of my gross earnings. I don’t think that too bad, given that I’ve just bought a house, I’ve got a firm financial footing and I’m thinking that it’ll only go up.

  11. I’m a little late, because when I first read this section I realized I would need some time to dig up these records (plus I wasn’t at home at that time). I’m only 26, and still in school, but I was extremely surprised to see that I’ve made almost 200,000 in my lifetime. They mention the mere act of calculating this may make you feel better about your situation, and I must say it does to some degree. Currently, I consider myself in debt because I have ~12000 balance on my line of credit, which weighs on me psychologically to some degree, but when I calculate my net worth I actually find that while my liquid assets are low, my fixed assets actually more than compensate, and I can say I have about 14% of my income accounted for in these assets. Obviously, not all of these came from my income (gifts, bequeathments, etc.), but it sort of brightens my day to see this. Nonetheless, I am still inspired to work towards the frugal life so that I may build my net worth. Everything I read has preached the values of recognizing this and starting it early (even earlier than me), but I am lucky enough to still have time on my sides. My only concern is that youth is not something to be wasted as well, and I have so much I still want to do in my young life (travel, experiences, etc.)

  12. I decided to find out the combined income my husband and I have earned (since I am a stay at home Mom and haven’t worked much in the last 11 years). Luckily we just got our Social Security earnings records i the mail, so that made it much easier. We are both 40 and together have made $1,258,094! (My husband alone has made over a million with my earnings only around $200,000, which is interesting to me since for the first 4 years of our marriage I earned more than he did. The next 3 years he outearned me, and then I stopped working.)

    Anyway, we have both felt very badly about our finances for quite some time. Seems like we have always lived paycheck to paycheck and often spent more than we earned. We currently owe almost $30,000 in debts, not including our home mortgage. So, we have felt like very poor financial planners and often beat ourselves up emotionally for this.

    Then I figured out our net worth, which I already had an idea of what it was. (I did it more in detail and was surprised to find that my original estimate of the value of our personal items to be around $10,000 – when I did it out in detail, room by room, it came out to be $9,960!)

    Our net worth didn’t surprise me, but what did was what a large percentage (at least much more than I had expected) of our earnings we have managed to save. It turned out to be 31%! This made me feel much much better about our finances than I ever have in the past.

    So, this was an uplifting step for me!

    (infix, you are only 22 years old – give your retirement earnings more time to grow – that’s when the compound interest really kicks in. Don’t be discouraged. If it wasn’t for our 401K we would have a very bleak financial picture.)

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