3361: Why Increasing Your Income Won't Solve Your Financial Problems by Andy Hill of Marriage, Kids and Money

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[00:00:53] [SPEAKER_01]: Das ist Optimal Living Daily.

[00:00:56] [SPEAKER_01]: Warum increasing your income won't solve your financial problems.

[00:01:00] [SPEAKER_01]: By Andy Hill of MarriageKidsAndMoney.com

[00:01:02] [SPEAKER_01]: Und ich bin Justin Malek.

[00:01:04] [SPEAKER_01]: Welcome back to our usual Sunday bonus episode,

[00:01:07] [SPEAKER_01]: where I share an episode from one of the other podcasts in the Optimal Living Daily Network.

[00:01:12] [SPEAKER_01]: It usually overlaps with the kinds of themes that come up here.

[00:01:15] [SPEAKER_01]: Today's episode comes from Optimal Finance Daily.

[00:01:18] [SPEAKER_01]: You can follow or subscribe to that show wherever you're hearing this,

[00:01:21] [SPEAKER_01]: if you enjoy what you're about to hear.

[00:01:23] [SPEAKER_01]: So with that, let's get right to the post and commentary from Diana as we optimize your life.

[00:01:33] [SPEAKER_00]: Why increasing your income won't solve your financial problems.

[00:01:37] [SPEAKER_00]: By Andy Hill of MarriageKidsAndMoney.com

[00:01:41] [SPEAKER_00]: I remember the day I received my first job offer.

[00:01:45] [SPEAKER_00]: A $38,000 annual income.

[00:01:49] [SPEAKER_00]: For a young guy right out of college, this seems like an absolute boatload of money.

[00:01:54] [SPEAKER_00]: I felt like Scrooge McDuck swimming through his vault of gold coins.

[00:01:59] [SPEAKER_00]: That same year, I leased an Audi convertible, bought my first home with 10% down,

[00:02:06] [SPEAKER_00]: and traveled on a week-long vacation to Mexico using my home equity line of credit, or HELOC.

[00:02:13] [SPEAKER_00]: I was in my early 20s.

[00:02:15] [SPEAKER_00]: I was living paycheck to paycheck, but I didn't care.

[00:02:19] [SPEAKER_00]: I was having a blast.

[00:02:21] [SPEAKER_00]: A few years later, I was able to increase my salary to $48,000.

[00:02:26] [SPEAKER_00]: I decided that if I really wanted to make the big bucks, then I needed to go back to school and get my MBA.

[00:02:32] [SPEAKER_00]: It would be a lot of hard work, and it would cost me $40,000 over the years I would be studying.

[00:02:38] [SPEAKER_00]: But I thought, hey, that's what you have to do to really increase your income, right?

[00:02:43] [SPEAKER_00]: Around my 27th birthday, I received a promotion that increased my salary to $70,000 per year.

[00:02:50] [SPEAKER_00]: I was ecstatic.

[00:02:52] [SPEAKER_00]: This was the most money I've ever made in my whole life.

[00:02:55] [SPEAKER_00]: And I felt like I was on top of the world.

[00:02:58] [SPEAKER_00]: Reality strikes.

[00:03:00] [SPEAKER_00]: Even though that 70,000 income number sounded like rock star status to me,

[00:03:06] [SPEAKER_00]: I continually felt strapped for cash, and I didn't understand why.

[00:03:11] [SPEAKER_00]: How could I be making almost double my original income and have nothing to show for it?

[00:03:17] [SPEAKER_00]: Around this time, the housing market crashed.

[00:03:20] [SPEAKER_00]: My HELOC that I had been using as an ATM was no longer available to me all of a sudden.

[00:03:25] [SPEAKER_00]: The bank told me that my home value had decreased so much that I no longer had equity in my home.

[00:03:32] [SPEAKER_00]: What the heck is equity?

[00:03:34] [SPEAKER_00]: You mean I can't get money to go to Coachella this year?

[00:03:37] [SPEAKER_00]: What the f-

[00:03:39] [SPEAKER_00]: Luckily, I had a stable job and I was able to keep my position despite the pending Great Recession.

[00:03:45] [SPEAKER_00]: This lack of available funds got me curious though.

[00:03:48] [SPEAKER_00]: I decided to read some personal finance books to try to get a better understanding of my disastrous money situation.

[00:03:56] [SPEAKER_00]: There was one phrase that continually stood out to me during my research.

[00:04:01] [SPEAKER_00]: Net worth.

[00:04:03] [SPEAKER_00]: Net worth versus income.

[00:04:06] [SPEAKER_00]: Net worth.

[00:04:07] [SPEAKER_00]: Now, I had heard the term net worth before, but I never quite grasped the concept.

[00:04:12] [SPEAKER_00]: I thought since I'm making $70,000 per year, I must be doing quite well.

[00:04:16] [SPEAKER_00]: My net worth must be way up there.

[00:04:19] [SPEAKER_00]: Nope.

[00:04:20] [SPEAKER_00]: My net worth was negative $50,000.

[00:04:24] [SPEAKER_00]: So it was really my net unworth.

[00:04:26] [SPEAKER_00]: Net worth.

[00:04:27] [SPEAKER_00]: Evidently, my accumulation of stuff over the years, including leased cars, an underwater mortgage, student loans, and a HELOC was a negative drain on my net worth figure.

[00:04:39] [SPEAKER_00]: Who knew?

[00:04:40] [SPEAKER_00]: How do you calculate your net worth?

[00:04:43] [SPEAKER_00]: For those who want to know what I didn't know, you can easily calculate your net worth right now.

[00:04:49] [SPEAKER_00]: Total up all of your assets, your cash, investments, properties, vehicles, etc.

[00:04:54] [SPEAKER_00]: This is what you own.

[00:04:57] [SPEAKER_00]: Then total up all of your liabilities, like your debts, student loans, mortgages, lines of credit.

[00:05:03] [SPEAKER_00]: This is what you owe.

[00:05:05] [SPEAKER_00]: Subtract your liabilities from your assets and voila, you have your net worth.

[00:05:11] [SPEAKER_00]: Assets minus liabilities equals net worth.

[00:05:15] [SPEAKER_00]: Change, please.

[00:05:17] [SPEAKER_00]: Now, it wasn't bad that my income continued to rise.

[00:05:21] [SPEAKER_00]: In fact, that was the only thing keeping me afloat.

[00:05:23] [SPEAKER_00]: From this point forward, I was determined to make a major change in my net worth figures.

[00:05:29] [SPEAKER_00]: It would be a combination of increasing my income and eliminating this nasty debt I had accumulated over the years.

[00:05:37] [SPEAKER_00]: Shortly after this epiphany, I focused intently and paid off $50,000 in debt in around 12 months.

[00:05:45] [SPEAKER_00]: This rapid change came through reducing my expenses, living on a monthly zero-based budget with my wife, and spending well below our income each month.

[00:05:55] [SPEAKER_00]: Yes, it required me to get rid of my leased car, not eat out as much, and not attend as many concerts.

[00:06:03] [SPEAKER_00]: But honestly, I was more excited about the direction we were heading in than any of those things I had as a part of my former debt-filled life.

[00:06:11] [SPEAKER_00]: The passion for change and desire for financial freedom continued as the years passed in our new marriage.

[00:06:20] [SPEAKER_00]: Today, my wife and I are still chugging away at this new net worth-focused life of ours.

[00:06:26] [SPEAKER_00]: Our net worth has gone from zero at the time of our marriage in 2010 to $640,000 this year.

[00:06:35] [SPEAKER_00]: We also plan to pay off the mortgage on our house in the next few months.

[00:06:39] [SPEAKER_00]: Life is looking bright now for our family.

[00:06:42] [SPEAKER_00]: I'm still working hard to increase my income every year, but I now realize that income isn't everything.

[00:06:48] [SPEAKER_00]: My income can go away in an instant.

[00:06:51] [SPEAKER_00]: If they felt like it, my employer could dump me tomorrow for whatever reason they choose.

[00:06:57] [SPEAKER_00]: My income would be gone, but my net worth would still be intact.

[00:07:02] [SPEAKER_00]: I feel a lot more secure with a high net worth as opposed to a high salary as well.

[00:07:08] [SPEAKER_00]: Better protection and more security sound like excellent reasons to skyrocket your net worth to me.

[00:07:15] [SPEAKER_00]: If you're able to earn a high income and build a high net worth, then you're really living the dream.

[00:07:26] [SPEAKER_00]: You just listened to the post titled,

[00:07:28] [SPEAKER_00]: Why Increasing Your Income Won't Solve Your Financial Problems by Andy Hill of MarriageKidsAndMoney.com.

[00:07:36] [SPEAKER_00]: I enjoyed this article because realizing that a high income wasn't going to solve all my problems was a big wake-up call for me.

[00:07:45] [SPEAKER_00]: I remember in college, one of my professors made a passive comment that if you can be earning six figures by the time you're 30, you'd be doing really well.

[00:07:55] [SPEAKER_00]: I took that to heart and was thrilled to reach that level before 30 years old.

[00:08:00] [SPEAKER_00]: But income is only one piece of the puzzle when it comes to financial success.

[00:08:05] [SPEAKER_00]: The thing that matters so much more than income is the gap between income and expenses.

[00:08:12] [SPEAKER_00]: This is the thing I should have been focused on all along.

[00:08:16] [SPEAKER_00]: Wealth is built in the gap.

[00:08:19] [SPEAKER_00]: We grow the gap by increasing income and reducing expenses.

[00:08:24] [SPEAKER_00]: We protect the gap by making sure we don't fall victim to lifestyle inflation.

[00:08:30] [SPEAKER_00]: We monitor the gap by tracking our expenses, budgeting, and calculating our savings rate each month.

[00:08:36] [SPEAKER_00]: And we can deploy the gap to get our money working for us in a variety of ways.

[00:08:42] [SPEAKER_00]: We can deploy or use the gap to pay off debt, build an emergency fund, and invest for our future.

[00:08:50] [SPEAKER_00]: A focus on the gap is really about money management.

[00:08:55] [SPEAKER_00]: And this is a much more powerful and reliable way to build wealth than solely focusing on growing income.

[00:09:03] [SPEAKER_00]: And that's a wrap for another Monday show.

[00:09:06] [SPEAKER_00]: Have a great start to your week.

[00:09:07] [SPEAKER_00]: And I'll be back tomorrow where your optimal life awaits.