Have you ever wonder how much money you’ve earned over the years? I mean, it has to be a sizeable sum if you’ve been in the workforce for a while. I was thinking about this and came up with a natural follow up question. Is our net worth more than what we’ve earned? After all, wealth is what you keep, not what you earn. We have been maxing out our 401k and invested in passive income for years. As a result, our net worth is pretty good. So I thought our net worth is higher than our cumulative earnings. You might think you’ve got this one as well, but hold on…
This question is simple and the answer isn’t that hard to figure out. However, you might be disappointed with the answer. It is extremely difficult to be worth more than you’ve earned, especially when you’re younger. It gets a little easier as you age because of compound interest, but I’m sure only very few households can achieve this impressive feat. That’s because saving and investing aren’t enough. You need a lot of time and luck as well. It is not impossible, though.
For most of us regular employees, it is very unlikely to be worth more than we’ve earned. First, taxes take a big bite out of our paychecks. After that, we all have bills to pay. Money gushes out every month for housing, healthcare, transportation, food, clothing, entertainment, cell phone, and all kinds of other stuff. It’s tough to save when you add up all the expenses of modern life. In addition, we need to invest those savings. It is mathematically impossible for your net worth to surpass your cumulative earnings if you simply save it. Even if you save 50%, your net worth will only be 50% of what you made. You need to invest and grow those savings to even have a chance.
Financial advisors recommend saving 10% of your income for retirement. This might be fine if you plan to retire at 67, but 10% won’t cut it here. Your net worth will never catch up to your total earnings by saving 10%. You’d need to save and invest at a much higher rate to win this one. Let’s look at our household as an example.
First, we’ll look at how much we’ve earned over the years. The easy way to figure this out is to head over to socialsecurity.gov and check your Social Security statement. Great news – we can login after hours now! Previously, you could only log on during East Coast working hours because they shut down access in the evening for server maintenance. That was silly because the internet is accessible 24/7. Anyway, here is a graph of our household earned income.
This graph is actually pretty neat to go over. My earnings increased rapidly when I graduated college and started working full time in 1996. It kept rising and peaked at $200k in 2012 when I quit working full time. The zenith in 2012 was an anomaly because I worked just 6 months and sold a bunch of stock options. Part of the gains was counted as earned income. As expected, my earned income took a sharp dive after I retired from my engineering career. However, I still had some income from blogging after early retirement.
My online income was excellent in 2017. It was the best year so far as a blogger and I made $65,388! It is so gratifying to make income doing something I enjoy. Self-employment is a much better fit for me than working in a corporation. Unfortunately, blogging isn’t very passive at this point because I spend 20-30 hours per week on it. That’s fine for now because I still enjoy blogging and I have time. Once our son goes off to college, I want to travel more and I’ll probably cut way back. That’s 10 years away, though.
Now, let’s see Mrs. RB40’s graph. She graduated at the same time I did, but went off to the Peace Corps for a few years. When she got back, she started working and gradually increased her income. In 2005, she quit work to get her Master’s degree and interned for a few years. Her earnings shot up after that and it is still rising at a good clip. She is doing very well with her current career and she isn’t ready to retire early yet.
Overall, our household income graph looks great and we’ve been able to save a sizeable amount every year. Here is what surprised me. Our cumulative income since 1991 is $2,909,858! Wow, that’s a ton of money. I can’t believe we earned almost 3 million dollars since we started working. That’s pretty amazing. You rarely notice how much money flow through your hands. We saved and invested diligently over the years (mostly), but our net worth is still below our cumulative earnings.
Below is the chart of our net worth VS our cumulative earned income. The RB40 household started off at $0 in 1996 and we’ve done relatively well over the years. As you can see from the graph, our net worth is consistently below our cumulative earnings. This is expected because we have expenses. Also, we never received any large windfalls such as an inheritance or lottery winnings. Everything we have, we built from what we earned.
Unfortunately, I didn’t keep close track of our finances until about 2005, so we’re missing some data points. The interesting thing here is how much 2007 and 2008 set us (along with everyone else) back. Our net worth curve took a detour, but it is slowly catching up to the cumulative earnings curve. The last few years have been really good. The net worth is steadily catching up to than the earnings. At this rate, the two lines might intersect soon. However, the stock market has been very volatile in 2018. It might be difficult to grow net worth over the next few years. We will probably see a setback like in 2007 again at some point.
We’ll continue to invest and our net worth should surpass the earnings eventually. It might take more than a few years, but we’ll just have to keep at it. The next inflection point will be when Mrs. RB40 retires. She plans to retire in 2020, but it’s not set in stone. We’ll see what happens in the next few years. Anyway, while this is a difficult metric to achieve, it is possible with high saving rate and consistent investing over many years. We are getting really close at this point.
Saving Rate and Compound Interest
The best way to beat this is to increase your saving rate. I used our data to plot 10% to 50% saving rates. The portfolio is the standard 60/40 split between stocks and bonds. I used real historical data for the S&P 500 and U.S. Treasury bond to be more realistic. Check out the graph below.
If we had invested 50% of all our earnings since we started working, our net worth would have surpassed the cumulative earnings in 2015. The 50% curve really shoots up in the latter years. That’s compound interest at work.
We saved and invested when we were young, but not at that rate. It’s a lot easier to save when you make more money. When we were making $60,000 per year, we couldn’t save as much because most of our income went to basic necessities.
I’m not discouraged, though. Our investments are compounding at a good clip now and our net worth gain has been outpacing our income every year since 2012. Eventually, our net worth will eclipse than what we’ve earned. This is why I said it’s a bit less difficult as you get older. At some point, your investment gains and passive income should outpace your earnings. This is especially true after retirement. Your earnings curve will flatten out and most of the income will be passive at that point. You can see the bend point in our earning line in 2012. Once Mrs. RB40 retires in 2020, it will flatten out even more.
Why is this so hard?
Now please take my poll below.
I suspect we’ll only see a few affirmatives here. This one is very difficult because you have to be in a sweet spot to achieve this.
- Lower income workers can’t save because almost everything goes to cover the cost of living.
- High income earners pay a ton of taxes and their earnings curve rises too fast. Their net worth can’t catch up.
You’d need to be in a sweet spot where you can save and invest consistently over many years to have a chance. Another way to achieve this is to earn outsized returns on your investments early on. Earning big returns on your investment will push your net worth curve up fast. Investing in real estate might be another short cut because rental income is not earned income. A big inheritance probably would help a lot as well.
Ultimately, this is just a thought exercise. It’s a huge bragging point if you’ve got this, but most people can probably retire comfortably without it.
About 16% of our readers’ net worth surpassed their cumulative income. That’s fantastic! How did you do it? Please share your secret with us. Is it due to time in the market as I suspected? Or something else?
Budgets are $exy has a post about this too – My Lifetime Earnings and The New Wealth Ratio. Circa 2015.
If you need help keeping track of your finances, try using Personal Capital to help manage your investment accounts. It is very easy to check on your net worth and investment with Personal Capital. Check it out if you don’t have an account yet. It’s free!
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For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.
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