Thanks Flickr
Thanks Flickr

As an almost thirtysomething, surrounded by the already thirtysomethings of my peer group, I feel a certain deep-seated anxiety that sounds a lot like “Why aren’t I well-off already?”

Off the top of my head, two reasons for that:

  1. Most of us were making our degree/professional qualification decisions during the early 2000s, right as the Global Boom was flipping into swing. We then embarked down our respective yellow brick roads, only to discover that Emerald City was all coloured lighting, with the downsizing and the no-bonuses right at the moment we professionally entered the workforce. So there’s that, unfortunately. But also:
  2. Facebook. And Linkedin. With all the self-congratulation (however unjustified/embellished).

And there was also a certain amount of expectation mis-management that took place. This:

  1. “Dear First Year Article Clerks. We know it seems like you’re not earning a lot. And that’s because you’re not. But don’t worry – it’ll all even itself out by the time you’re in third year.”
  2. “Dear Third Year Article Clerks. Yes, we know we said it’d even itself out. And it has, sort of. We also know that it’s less than you were hoping for. But don’t worry – you’ll really feel a difference when you’re fully qualified.”
  3. “Dear Newly Fully-Qualified. We know that you’re not really feeling too much of a difference. But it’s because you don’t quite have the experience yet. So don’t worry – you’ll get the real pay-bumps in a few years’ time, when you’re experienced.”
  4. “Dear Fully-Qualified with four/five years of experience. You’re certainly earning more than you were, but less than you’d like. To be honest, you only really earn the big bucks when you make partner. Give it until then.”
  5. “Dear Partner. Oh – sorry – I meant junior partner…”
  6. *leaves and forms own practice*

As I see it, all the above has two sad outcomes for the millennial advance guard:

  1. We constantly feel underpaid; and
  2. Disillusioned fears of worthlessness*
    *Not completely worthless – just worth less.

The good news: it seems that everyone everywhere feels generally underpaid. So we’re not alone in that.

The bad news: fears of worthlessness annihilate joy. Which is properly tragic, given that our late 20s/early 30s is the golden age of less responsibility, more disposable income, and the good health to take advantage of it.

How To Make It Better

Two approaches:

  1. The high road: see a therapist, find a spiritual mystic, cultivate inner peace, discover joy.
  2. The band-aid: self-appraise more accurately. As in, with a spreadsheet. To make the high road feel less like toil and more like a frolic.

Self-Appraising More Accurately

When most people (and financial planners) calculate your net worth, they do something like this:

  1. Calculate the value of your assets (house, car, savings, provident fund contributions, miscellaneous trinkets of some value);
  2. Calculate the value of your liabilities (mortgage outstanding, car finance, overdraft, student loans, etc);
  3. Subtract 2 from 1
  4. And voilà – your Net Worth.

This is wrong.

In fact, for a thirtysomething, this is wildly wrong.

Because as I’ve pointed out elsewhere (in particular, this post on risk diversification), your most signficant asset is missing from that equation.

Some points:

  1. Each year, you generate an income by using your skills/abilities/networks.
  2. You have a limited lifespan within which to generate that income.
  3. And all the other assets – the homes, cars, savings and trinkets – are the residual leftovers from the proceeds of the income that you generate.
  4. Call it your “earnings potential”. Or perhaps “the cumulative education and experience that led to you finding yourself in this position”.
  5. Either way, for a thirtysomething, that is your real asset.
  6. It even earns capital appreciation – by increasing in value as you go on to gain more experience simply by virtue of being in a workplace.
  7. And as time passes, you draw down on more of it.
  8. Until eventually, by the time you hit retirement, the asset is fully realised in cash/savings/tangible assets.

You have to include the value of that asset in your equation.

Of course, it also means that you have to include the value of the implied liability as well (after all, we require maintenance – food, shelter, medical cover, entertainment – so a large portion the asset’s return gets spent each year).

But helpfully, this also starts to illustrate the power of our habits. Which I’ll get to shortly.

Firstly, the Simple Scenario

The easiest starting point is to assume that you’ll earn exactly what you earn today (and save what you save, and spend what you spend), for the next 40 years (until you’re 70). And you’ll do that in real terms*.
*I’m going to keep saying “in real terms” because I’m talking about purchasing power. If a 70 year old earns R2 million today – then by the time you turn 70, you should expect to earn the future equivalent of whatever can buy the same volume and quality of goods as can be purchased for R2 million today.

And you then calculate the value of that using a real return figure (let’s call it 2% – because that’s about the historic norm).

Here’s an example:

  1. Let’s say that you earn R400,000 a year after tax.
  2. 12.5% of that goes into a pension fund.
  3. 30% goes into your mortgage bond.
  4. You manage to save R20,000 a year.
  5. The rest gets spent on food, clothing, home maintenance and holidays.

What that means:

  1. Annual real income generated from the asset: R400,000 after tax
  2. Annual non-recoverable costs of running the asset: R210,000*
    *R400,000 – invested income of R190,000 – see below.
  3. Annual real residual income placed into investment portfolio: R190,000*
    *Pension contribution of R50,000 (12.5% of R400,000) + Mortgage Bond payments of R120,000 (30% of R400,000) + Cash Savings of R20,000 = R190,000

If you were to save R190,000 per year for 40 years, the cumulative total is R7.8 million.

And because the return of the asset is keeping pace with the real return of the economy, the value of the asset is R7.8 million.

As in: that’s what you’re worth today, if your earning and spending habits don’t change.

Then, the Increased Value Proposition

But that’s not realistic, because of the greater value that most professionals represent to society as they go on.

So if you assume that your relative worth to an employer goes up by 10% per year until you hit 40, and thereafter you’re up by 5% a year, your real earnings graph looks like this (and for the sake of simplicity, I’m just going to assume that your spending habit stays a constant proportion of your income):

Annual Real Earnings
Annual Real Return on Your Investment

And that’s not an outrageous assumption. If you want a real earnings projection, you’d look at the people on a similar career path to your own and what they earn today, and you’d say “my best estimate is that I’ll be earning what they earn in real terms by the time I reach their age”. And if they’re earning more than R2 million a year – then you’re sounding conservative, son.

Then if you look at the cumulative real returns, you get this:

Cumulative Real Earnings on Your Investment
Cumulative Real Earnings on Your Investment

If we were to calculate a value of what your increasing-return asset is worth today, then you’re looking at a number of around R22.8 million.

That’s R22.8 million. In real terms. Assuming that your savings only earn a real return of 2%.

So if you’re feeling a bit panicked, then just relax. There’s no need to panic.

You need a paradigm shift, because you’re currently discounting the value of your largest asset down to zero.

It’s not worth zero.

Here’s a better self-image analogy:

  1. Your talents and skills are like an oil well.
  2. The oil is already a proven reserve.
  3. The only conversation we’re really having is one of extraction and distribution– as in, are you getting the good stuff out as efficiently and cost-effectively as possible; and are you selling it for the right price.
  4. But if you keep trying to prove that there are reserves, over and over again, before you do any more digging, then you’re just wasting time. And energy. And time is ticking.

Finally, the power of good habits

New proposition: because you’re a believer in good habits, you decide that you’re only going to let yourself spend 50% of the new disposable income you have arising from any increase your receive (ie. after all those increased pension fund and mortgage repayments). The rest is going to go into a new savings account, and accumulate.

Your new return graph looks like this:

Annual Real Returns When Saving 50% of increased disposable income
Annual Real Returns When Saving 50% of increased disposable income

And cumulatively:

Cumulative Real Returns of saving 50% of new disposable income
Cumulative Real Returns of saving 50% of new disposable income

So what is that worth today?

About R32.3 million.

Making that a roughly R10 million habit.

The Take-Home Messages

  1. Relax.
  2. Savings habits maketh the man (more valuable).
  3. Get good insurance: income protection, disability, health… You have to protect the vital asset. Don’t be foolish.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at