In the hustle of everyday life, there is a tendency to focus on the here and now when it comes to money. Regardless of your money-management ability, we are wired to the cycle of pay-day; monthly bills, discretionary spending and, if we are smart, putting money away into savings.
Please note that this post does include affiliate links.
We know saving is an important component of achieving financial independence – perhaps even the most important. However, our eventual success at achieving our goals may be as much to do with our past relationship with money than just the pure mechanics of moving numbers around.
Have you ever stopped to consider your ability to generate money and just how much has entered your life and might enter your life in years to come? The amounts that have flowed towards you might, in fact, surprise on the upside. How efficient you have been at harvesting that money will inevitably disappoint. But part of correcting course for the future is making peace with the past.
Your Money Or Your Life
One of my favourite personal finance books in recent years is ‘Your Money or Your Life’ by Vicki Robin. This amazing book has long been considered one of the ‘go-to’ books of achieving financial independence through a detailed 9-step process. It’s a book I highly recommend as core reading in your FIRE tool-box.
The very first step of this process is called ‘Making Peace With The Past’ – essentially surveying your relationship with money with the aim of increasing your self-awareness of your finances, placing you in time and space, to review (without blame) your earning and spending behaviour in the past. The step is comprised of two parts:
- Find out how much money you have earned in your lifetime – the sum of your total gross income (i.e. what have you generated)
- Then calculate your net worth by creating a personal balance sheet of assets and liabilities. (i.e. what have you got to show for it?)
In this post, I’m focusing on step 1, but step 2 is also highly recommended if you are not already doing this as part of your broader net worth calculations.
When I first performed this task it certainly had a powerful impact on me. When you see a lifetime earnings number and sit back and reflect on what you have to show for it, it really hits home, how, if only for better financial awareness at a younger age, how different the path to FIRE today might have been.
In the book, Vicki Robbins highlights a number of benefits to this exercise, and I quote:
- It clears the fog shrouding your past relationship with money. Most people have no idea how much money has entered their lives, and therefore how much money could enter their lives going forward
- It eradicates myths and false self-concepts around your relationship with money
- It gets you to ground zero, enabling you to begin any financial overhaul with a clear head and confidence in your wage-earning ability
- It allows you to see and let go of skeletons from your past you may have in your closet – any secrets or lies that may be distorting your relationship with money
In the U.K. the only document you really need is your annual P60 Document. For those residing outside the U.K., the P60 is the official tax record for a given tax-year, stating your total earnings and tax paid for that given tax year. You will no doubt have a similar tax record from which you can gather the necessary data.
I was always told to keep your P60s as these cannot be re-issued easily so I have always ensured these were kept under lock and key with other important documents. As such, I have a P60 for every tax-year since I began working full-time post-university in 1998. With the total gross earnings, total tax paid, its, therefore, a doddle to deduce total net pay for each year and overall.
So armed with this information it’s then possible to make a judgement as to our lifetime earnings, the growth of those earnings and what we have to show for it.
I’m sure if you have read Your Money Or Your Life, you may well have performed this exercise already. If not, I encourage to both read the book and perform this insightful exercise. So, try the following steps:
- Grab all of your historic P60 documents (or equivalents for your country of residence)
- Pop down in a spreadsheet the total earnings for each tax year, total tax paid and then subtract one from the other to get your total net earnings.
- Repeat for each period for which you have data
- Missing data? The last payslip for the tax period may have the same information – contact tax office?
- Once the above steps are completed you can establish your annualised rate of earnings growth in both gross and net terms
- If you wish, get geeky and work out all sorts of short-run versus long-run averages, overall and for specific employment periods. I’m a geek but I appreciate you may not be 😉
Once I had crunched my numbers, I was amazed to see in cold hard figures that, as of the end of the last tax year (April 2018), I had earned just over £1.6m in my working life to date; parted with over half a million in tax, leaving total net lifetime earnings of just over £1m.
Wowzers! If only I had a 50% savings ratio from day 1 I’d probably be long-retired by now 🙂
Not one for dwelling on the past, I still think its a worthwhile exercise for anybody to do, be it long-term or short-term and, as an exercise, certainly fulfils many of its stated objectives in terms of guiding forward thinking.
For example, it’s really valuable to see that I’ve actually earned a decent chunk of money by my early 40’s and that, with tighter control and clear FIRE objectives in my life plan going forward, I should be able to harvest an increasing amount of that future earning potential into my financial independence pot.
My annualised rate of earnings growth over 19 full tax-years has been 11.4% per year (net), comfortably ahead of inflation, so the opportunities are there to do better and so the onus is on me to utilise my money generating ability and let go of the past.
In many ways, it also suggests that I’ve historically allowed lifestyle inflation to grow at a similar rate as I’m certainly a long way of a millionaire. Lifestyle inflation is now something I continually try to avoid.
This exercise may also have more practical, short-term applications. Some years ago, I did a similar exercise when I confirmed my suspicions that my net pay was actually not really growing at a good rate year-on-year despite (in gross terms) it having seemingly kept up with inflation. I managed to leverage this analysis with my boss in such as way that I received a mid-year pay rise.
For that outcome alone it was worthwhile 🙂
Have you read the book and performed this exercise? I’d love to hear what positive impact it had on you and how it altered your relationship with money, so leave a comment below!
Thanks for reading!