It's not what you earn that counts …

I wrote a post a short while ago assessing whether the rich should invest in Index Funds.

I received a few interesting comments, including this one from a reader named Mike, that I thought I should share with you all:

Would you do a post that considers the lifetime earnings of different people? Reason being I read an article that high school graduates earn an average lifetime earnings (from 25 to 64) of $1.2 Million. For people with a college degree this goes up to $2 million, with a Masters it’s up to $2.5 million and a PhD brings in $2.9 million. For people with professional degrees (doctors & lawyers I presume) the number goes up further to $4.4 million. Still not bad, an average of $100K per year for the latter category. For the purpose of this article I’m assuming that all earnings are reconciled to net present values.

So you’ve managed to earn $7 million in 7 years… that’s really impressive and nearly twice that of a doctor’s lifetime earnings. What have you earned throughout your life?

For me I’ve earned $2 Million in my life to date. More than half of this has come in the last 3 years. I’m 35 now and have been working since I was 23. I figure between now and age 65 I should be able to earn a total of about $8 million more with an medium / optimistic case. I will pursue investments but realize high risk brings high reward but potentially devastating losses. For example I’ve taken a large position ($110,000) in a Chinese stock with what I believe to be very strong fundamentals and have researched this company for the last 4 months in detail. In the last 3 weeks the stock is down 30% from where I bought in…! So I don’t put everything into high risk investments for that reason.

I think starting a business has elements of this… if your business crashed you would have lost it all I guess?

Firstly, here is the official government report that I believe Mike is referring to:

However, I am totally unconcerned with income or lifetime earning potential … I believe that there is very little correlation between what a person earns today – or over their lifetime – and, how wealthy that they are …

… you see, it’s not what passes through your hands, but what sticks that counts!

I remember reading the book that passes for a ‘bible’ amongst the personal finance community: The Millionaire Next Door (because, to a casual reader, it appears to equate ‘frugality’ with ‘wealth’, which of course is only a small part of the story) and was struck by the story of two doctors:

Both were on super-high incomes, yet one doctor was ‘rich’ and the other ‘poor’ …

… one had saved/invested a good proportion of his ridiculously high earnings, but the other had lived the ‘high life’ and was in debt.

Same income … vastly different outcome.

So, when Mike asks:

So you’ve managed to earn $7 million in 7 years… that’s really impressive and nearly twice that of a doctor’s lifetime earnings. What have you earned throughout your life?

… I say: I didn’t ‘earn’ $7 million in 7 years in the traditional sense; plenty of corporate CEO’s, super-high-flying attorneys, and some medical specialists earn more that that in 7 years (some in 1 year).

In fact, at the time my ‘take home’ and total combined business incomes were less than many professionals earn, and certainly nowhere near the stratospheric heights that I just mentioned …

… no, I ‘earned’ the $7 million by investing my far more modest earnings and my Net Worth grew faster than my earnings ever could.

Keeping the ‘two doctors’ story in mind, do you now see why I don’t care what my lifetime income was? If not, consider Mike’s closing question:

I think starting a business has elements of this… if your business crashed you would have lost it all I guess?

The answer to this question is the key to Making Money 301 (keeping your wealth) and explains why income is so unimportant from a wealth perspective:

For the ‘poor doctor’, when his income stops so does his (financial life); if he loses his ability to earn his ‘paycheck’ through some disaster (he certainly doesn’t have the luxury of retiring, yet) he is just on broke!

But, it’s possible that our ‘rich doctor’ may be O.K. albeit at a lower standard of living … at the very least, he is debt free. At best, he has some passive investments to help sustain him and his family … probably not enough to sustain his current lifestyle, though.

In my case, I ploughed as much income into investments as possible and waived all ‘pay increases’ (I could have ‘paid’ myself a higher proportion of my business profits, but chose not to) …

… in fact, my wife kept working, as she earned more than I took home.

In doing so, we put ourselves in a position where it would not matter if the businesses crashed … we would not have lost it all. In fact, the bulk of the $7 million in 7 years was in passive real-estate … selling the businesses just two years later was the ‘cream on top’.

The Making Money 301 ideal is this:

Earn money, plough 100% of it into investments, live off the income of these investments as though you were already retired … increase your spending only as the portfolio income increases.

Simple and self-sustainable … of course, for most people, the ideal is not achievable, which is why you start with ploughing 10% of you income into investments, and build from there …

BTW: Visit this week’s Carnival of Personal Finance; we have an article published there ,,,

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6 thoughts on “It's not what you earn that counts …

  1. Dear Adrian,

    Speaking of the business profit, how did you decide between ploughing back the certain amount into the business for further growth and withdrawing for the investment vehicle?

  2. You are absolutely right on this one. The only advantage the high income person has is the ability to direct more to asset collection. Of course, what happens for most is that they increase their living expenses at the same rate as their income. Having pulled many credit reports and seen many personal financial statements I know that income and wealth are only weakly correlated.
    Personally, I have created wealth with only slightly higher than average income. The key is to take control of your financial life from the mutual fund sales folks, learn how the wealthy created their wealth and develop a plan.

  3. @ Bill – I gave myself only two pay increases in 15 years; the first from $30k to $50k. The next ‘payrise’ came in 2004 when I moved to the US and had a ‘blue chip’ JV partner picking up half the tab.

    Naturally, 100% of the balance of profits went into: 1. Reinvestment to grow the businesses, and 2. our RE portfolio … the ‘good life’ could (and did) wait!

    @ Shaferfinancial – The high-income earner certainly has that ‘ability’ but rarely seems to exercise it 🙂

  4. Hi AJC,

    First of all thanks a lot for doing this post!

    I asked about lifetime earning power because I was concerned about what ‘sticks’ and to start this from nothing you have to have some income and be able to save it to use for investments. I kept my lifestyle very simple and focused on buying assets that don’t depreciate to grow my wealth.

    The challenge for the high earner is to keep expenses frugal and save up for a rainy day. Having the freedom to get out of the daily grind is worth more to me than having many shiny toys.


  5. $7 million equal to Rp.63,000,000,000 ($1= Rp.9,000) !!!!. do you know indonesia? it’s my contry i live in. we have very different culture and how we make money too. would you give me advices that will bring me to be a rich man, just around $ 100,000 in 5 years start from now?

  6. @ beranibaca – I am not certain that the ‘rules of money’ change anywhere, anytime … just ceck out the Richest Man in Babylon (available from to see 🙂 In the meantime, check out and you will have your answer.

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