I was searching everywhere online on how to get more power out of my 1971 Ford Maverick. The consensus was that I needed to replace the worn out 200 ci engine for a stroked 331 ci engine. This was going to be around $5,000 in parts and another $3,000 in labor.
I then met a guy online who told me to come down to his shop and have a talk with him before spending that kind of money. He asked me why I wanted more power – well, to go faster of course. I was tired of the car inching forward from the line like a snail.
He told me to just change the gearing in my rear differential and I would have all the power I wanted. Cost? $750, including labor. But how is that possible? I’m not adding more power, why would changing the gearing make a difference? Who the fuck is this guy?
Let’s just say he was right. His idea went against what everyone else recommended but he wasn’t hung up on my words but focused on helping me satisfy my actual needs of leaving the line faster which this $750 strategy accomplished.
Why do we work?
Why do we earn an income?
Why do we care how much we earn?
Why do we look for ways to curb our taxes?
Why do we save?
Why do we invest what we save?
What do we track our investments?
Defining Income
Income is the number of dollars we are paid.
It doesn’t reflect value, only numbers. When you ask how much someone makes, you don’t ask them what their overhead is and what city they live in.
That’s why currency was invented, it allowed for standardization of financial transactions. We know that a Family Doctor makes at least $250k and an orthopedist makes at least $400k.
Income & Taxes
We can extrapolate the income even further. We know that if a healthcare professional is an employee then they are paying somewhere around 40% in taxes. So we have an idea what the value of their income is.
If our colleague owns their own business then they likely wouldn’t be talking about their income but their profits from the business. I mention it to point out how important the terminology is.
Income & Expenses
I get it that our income is a sort of status symbol in this world. I have always identified strongly with my insanely high income. It was a point of pride.
Telling someone that I make $300k/year was impressive – completely inaccurate but it’s the accepted vernacular. I wasn’t making $300k a year. I earn an income of $300k and probably keep $180k of that after taxes.
It’s not even that simple.
I wish I could leave it alone there but just because we’re used to using the income terminology doesn’t mean that we are referring to our wealth. After all, wealth is what you keep not what you earn. And wealth is what matters when it comes to finances. The salary is just the big bulge in the pants.
Budgeting Is A Form Of Income
Income is coincidentally used to reflect our wealth.
A person is said to be wealthy or rich if they earn even $100k/year. If you’re earning $300k then you’re considered very wealthy. Few will ask you what you actually keep of that income because we’re just not trained to think that way.
It might be annoying that I’m using semantics here to make this point but I have mentioned that budgeting is one of the ways of diversifying your income in retirement. This is the main reason I wrote this post. Because how can budgeting be a form of income? Lemme ‘splain.
Spending Based On Our Income
An NP will have a $400,000 home.
A Family Doc will have a $700k home.
A cardiologist will have a $1.5 million home.
A multi-millionaire entrepreneur will have a $7.5 million home.
Our cars and what we spend on education for our kids follows a similar pattern. And not because we want to flaunt our income but because we are raised in a society where it’s normal to have external controls, not internal ones.
From the below chart from BLS you can see that when households earn more they proportionally spend more on travel for entertainment.
Some of us spend to the limit of our income.
Some of us drive as close to the ass-bumper of the car in front of us.
Others will drive as fast as they can before getting a ticket.
We push ourselves right up to the edge of exhaustion and burnout.
Budgeting To Keep More Income
When we budget we start making specific plans for our income. Sure, some are inherently frugal and are way ahead of the game but I think that phenomenon is quite rare.
Just like we plan exactly how we will invest our savings, we can plan in detail how we will spend our upcoming paychecks so that we can decide how much of it will stay in our pockets, instead of society deciding for us.
So in summary, it’s what we keep of our income that matters, not what we earn. That’s why we need to have intimate knowledge about our taxes, our bills, our unexpected expenses, and our debt.