The younger you are, the wealthier you are

* No, this isn't a "your health is your wealth" post. It's strictly financial.

If I asked you to calculate your net worth, you'd probably add up the value of your assets, add up your liabilities, subtract your assets from your liabilities, and come up with a number.

Your liabilities are probably fairly straightforward. And you'd probably think your assets are, too. You can look at your bank statements, and if you have financial assets you can pretty quickly come up with an exact figure. If you have a home, you probably have a good sense of what it might be worth, or at least recall what you paid for it. You might know the value of your cars, and give a rough estimate of the "stuff" you own. Or you could look at what you've insured everything for.

If you have an interest in a privately owned business, you might be a little unsure. It's hard to give an exact figure for what it will sell for, or what exactly it's worth to you. But you might give a rough figure, or at least a range, so that you can work out a rough range for your net worth.

So far so good, right?

Yes. But I want to point out another asset. If you're young, you've got an exceptionally valuable asset. In all probability, it is going to generate an income for you for many decades. You might not know exactly what the income will be, but it will probably be a significant amount. Probably more than any other asset you own. We're probably talking in the millions.

If you had something that was going to generate this amount of income, wouldn't you want to consider it when you calculate your net worth?

That asset is you. Over the course of your career, you will generate a lot of income. The income is probably going to be fairly regular. If you follow a similar trajectory to many professionals, it is likely to increase substantially from when you graduate until you become a senior member of your chosen profession.

The younger you are, the more income you have ahead of you. As an asset, the more valuable you are. That is your future labour value.

As you get older, and you get closer to retirement, your labour value reduces until you stop earning an income. There will come a time when, from a financial perspective, you deplete this very special asset.

By that time, the hope is that you've translated some of your income into wealth in a different form. For example, equity in a house and financial investments that can generate an income for you.

But in the absence of extraneous or unusual factors, such as a significant inheritance or similar windfall, or an exceptionally successful business venture, your future labour value is likely to reduce more quickly than other assets on your balance sheet. This is because, at least for the majority of your career, your income won't just go towards building wealth, but will go towards the expenses of living.

It's true that as you get older, your assets become a lot more "real", in the sense that you can use them to buy things. There's some truth to the saying that "profit [and intangibles generally] are opinion and cash is king."

But the older you get, the less time you have to turn those intangibles into cash. The younger you are, the more time you have to make wise decisions. 

So think about it. The younger you are, the wealthier you are. 

Some corollaries: 

  • Like a lot of other assets, you can invest in it and make it more valuable. You might not be able to do anything to increase your income tomorrow, but you can take steps that have an impact over the long-term. It's worth playing the long game, investing, and taking steps to try to maximise your long-term income. 
  • As you move closer to retirement, you are depleting a valuable asset. Viewed through this lens, saving for retirement is a process of translating one form of wealth into another, more tangible, form of wealth that can generate an income for you when you cannot.
  • Your ability to generate income is an asset - and possibly your most valuable asset. You insure assets like your home, your contents, and your cars. Wouldn't you also want to insure your most valuable asset?

Sonnie Bailey

Sonnie is the founder and principal of Fairhaven Wealth.

Before founding Fairhaven Wealth, Sonnie worked in the legal and financial services industries for over a decade.

Sonnie first became involved with financial advice as a specialist financial services lawyer. For many years, he was an “adviser of advisers”, reviewing thousands of advice files prepared by hundreds of financial advisers, and providing feedback in relation to the quality and appropriateness of advice; industry best practice; risk management; and regulatory compliance. He has published work in industry publications and spoken at various financial advice conferences.

Sonnie has also worked with banks, investment management firms, insurers, and derivatives providers.

Sonnie has worked as a private client lawyer, focusing on succession, estate planning and trusts. He ran his own legal firm in Australia before relocating to New Zealand. He has also acted in independent trustee and company director positions.

Sonnie is passionate about helping people achieve their goals and manage the risks to which they are exposed.

He has written extensively on his blog, New Zealand Wealth and Risk, which can be found at www.wealthandrisk.nz.

Sonnie is married to his wonderful wife Chrissy, and has two young children, Ben and Anna.