Receiving your Lifetime Earnings Upfront

Finance
Receiving your Lifetime Earnings Upfront

This idea has been in my head for a while and the other day I heard a reference to it. As a thought exercise I will state it as a question: How will your financial behaviour be impacted if you received all your lifetime earnings upfront or at least new how much it will be? No matter if you are an entrepreneur, a salaried employee, freelance worker etc. If in some way your total income for your lifetime is paid to you once you’ve become independent, how would you manage your money?

As a thought exercise I would like to dissect this a bit and understand if it would fundamentally change personal finance behaviour. I believe you should be the CFO of your finances, but will this situation promote such a way of thinking?

The rules

In order to go through this thought exercise, I will define the rules and assumptions. I know my inner engineer is spoiling the dream, but the playing field should be defined in order to properly reflect on this.

  • Your total lifetime earnings are received at the date you started looking after yourself. When you became independent. For me this is when I graduated at age 22. Sure, my parents helped out here and there, but technically I was independent. For some it might be earlier and others later, but this is a good peg in the ground.
  • This lumpsum of money will be at adjusted by inflation to its present value. So even if you earned double your salary in the future purely based on inflationary increases it would still be provided on its present value.
  • All your income has already been taxed upfront as it would have been throughout your earnings career. I am sure the government would love this. Therefore, no income tax will further be paid unless this money is used to generate passive income where the applicable tax (income, capital gain, dividends, etc) will be charged.
  • Magically in this scenario this upfront earnings provider also knew how long you would work to actively earn an income. So, if you will retire at 30 or 65 your relevant active earnings would be provided up front. Unfortunately, you have to still work all those years that you would have worked in any case.
  • You can only access money you would have had at that stage of your life. Therefore, if your lifetime earnings are $ 2 million but your first month’s paycheck after tax is $ 2000 you can only access the $ 2000 after the first month. Although I would have liked to have just given you the $ 2million up front I think most people would then just live off the interest or easy passive income. Some would maybe buy a Ferrari and live of the rest, although I don’t think most readers of this blog will take that approach. This rule not only provides visibility of how your income will grow over time, but more importantly visibility of how much is left.

Application

Now you know how much money in its present value you have left to spend. However, you can only access some of it but at least you know exactly how much will be coming in the future. The question is will this change your behaviour and how you managed your finances when you became independent?

Let’s look at some scenarios. After the first month you receive that $ 2000 but you know there is still $ 1,998,000 on its way over the next 40 years. So, what do you do? Here are some potential scenarios:

  1. You have always craved a certain lifestyle. You use the $ 1,998,000 as collateral and start living this life. You get a mortgage for your house and you lease a car. With the terms of this new debt you can squeeze it into the $2000. For living expenses, you will however have to use your credit card which can be settled at a later stage.
  2. You use the exact $ 2000 knowing you are covered for 40 years in any case. You also know in six months from now you would have gotten a promotion and would be earning $ 2500. Next year that would even be more as it gets adjusted by inflation. You can start saving when it is just a little bit easier and the margins are not as tight.
  3. You understand that there is only $ 1,998,000 left after this and after 40 years there will be 0 left. You therefore try to live off a $ 1000 for the first month. You save $ 500 for a place to stay or a vehicle and invest $ 500 long-term knowing it will be worth a $ 1000 10-years from now. You start looking out for a place to stay long-term where a mortgage might be required but can be paid off quickly. You are still calculating if this is worthwhile based on your future income and the potential expenses of having a place to stay.

The shocking truth is that $ 2 million is actually close to the truth. In 2009 the average American with a Bachelor’s Degree was poised to earn $ 1.8 million in his lifetime. For woman this number was unfortunately even lower. For South Africans taking purchasing power parity (PPP) into consideration lifetime earnings will be 40% less than the US. The worst is at the moment the average American will spend in excess of $ 1 million more than he earns in his lifetime.

The outcome

Will having this knowledge and visibility early in your life have converted you to scenario 3, or at least 2? We always live as if money is infinite and time is not. Although money does not have a ceiling but your time on earth has, nobody’s money is infinite. In this situation everyone would have received their earnings up front, even Jeff Bezos. So why do we live as if there will always be more money in the future? As if we are going to get some sort of huge windfall which will just reset the score to zero again. If you received all your earnings upfront you would know that you are actually never going to win the lottery.

Having thought about this I truly think that if this is the way life worked less people would default to scenario 1 and more would opt for scenario 3 or something in-between. If you know this huge windfall is not coming surely you will live your financial life differently? I believe the average person will live a more of protective, wealth growing and financially educated lifestyle. Unfortunately, scenario 1 is very much the norm at the moment.

In conclusion, it is a good exercise to calculate your hypothetical future earnings at its present value. Understand how much is potentially left, reflect on it and ask some difficult questions. Take this thought process and apply it to your own finances and see how it impacts you.

Always grow your wealth for tomorrow while being content with your wealth today.

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