Rethinking the Importance of Income: Why It Only Matters Most in the First 15 Years

The premise of this blog is having money work for you. In this example, we'll look at two examples. One will be a construction worker who starts after high school. The second person will be a doctor who starts

Example 1:

Construction worker:

• Makes $90,000 per year

• Saves 40%, $36,000

• Gets 10% return in the S&P500

• Has $0 in student loans

After 15 years, her's 33 years old. From compounding, the amount he has built up is $1,258,190.

That $1,258,190 makes him over $125,000 per year. He likely never has to work again if he doesn't want to.

Example 2:

People are often pressured into thinking that having a prestigious degree that makes you a doctor or other high status job is the only way to get rich. The mistake they make is that they think that income gets you rich.

Doctor

• Delays their work for 8 years

• Makes $400,000 when they start

• Since the doctor will be taxed at around 10% more than the construction worker with lower income, we'll reduce the savings rate to 30%; $120,000 a year

• They have $400,000 in student debt at 4% interest.

• They start investing in the S&P500 at 10% after their debt is paid off.

This example will show the process of getting out of debt by the doctor. Once that is done, they'll start investing the 30% into the S&P500 at 10%.

Year 9:

Student debt balance:

$416,000

After pay down:

$296,000

Year 10:

Student debt balance:

$308,000

After pay down:

$189,000

Year 11:

Student debt balance:

$195,000

After pay down:

$75,000

Year 12:

Student debt balance:

$78,000

After pay down:

$0

Amount invested:

$42,000

After 15 years, the doctor has a net worth of $492,822. The construction worker has a net worth of $1,258,190.

The doctor might argue that it's about the long game. Let's run those numbers another 10 years continuing the same savings rates from the doctor and the construction worker.

Construction worker after 25 years:

Doctor after 25 years: Ready to get your mind blown?

Over $500,000 less money than the construction worker after 25 years.

Conclusion:

Time is the greatest friend of money. Getting started early and letting money work for you is how to get rich. Stop chasing the allure of income when compounding is the mechanism that truly works.

As of today, Dec 22 2024, I'm around the $600,000 net worth mark at 28 years old, investing in apartments and the S&P 500. That's about on track with what purely investing in the S&P 500 would get you.