18 September 2016

The younger you are, the wealthier you are

Sonnie Bailey

* 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?


About the author 

Sonnie Bailey

In his spare time, Sonnie likes telling people that he’s a former Olympic power walker, a lion tamer, or that he is an orthodontist. He is none of those things. In reality, Sonnie is a financial planner based in Christchurch. Through his business, Fairhaven Wealth (www.fairhavenwealth.co.nz), he provides independent, advice-only, fixed-fee financial planning services. Sonnie is a “recovering lawyer”: he has specialised in trusts and personal client work. He has also worked as a financial services lawyer for many years.

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