Why Increasing Your Income Won’t Solve Your Financial Problems

I remember the day I received my first job offer. A $38,000 annual income! For a young guy right out of college, this seemed like an absolute boatload of money. I felt like Scrooge McDuck swimming through his vault of gold coins!

That same year, I leased an Audi Convertible, bought my first home with 10% down and traveled on a week-long vacation to Mexico using my home equity line of credit (HELOC). I was in my early 20’s, I was living paycheck to paycheck but I didn’t care. I was having a blast.

A few years later, I was able to increase my salary to $48,000. I decided that if I really wanted to make the big bucks, then I needed to go back school and get my MBA. It would be a lot of hard work and it would cost me $40,000 over the years I would be studying, but I thought “hey, that’s what you have to do to really increase your income, right?”

Around my 27th birthday, I received a promotion that increased my salary up to $70,000 per year. I was ecstatic! This was the most money I’ve ever made in my whole life and I felt like I was on top of the world.

Reality Strikes

Even though that $70,000 income number sounded like rock star status to me, I continually felt strapped for cash and I didn’t understand why. How could I be making almost double my original income and have nothing to show for it?

Around this time, the housing market crashed. My HELOC that I had been using as an ATM was no longer available to me all of a sudden. The bank told me that my home value had decreased so much that I no longer had equity in my home. What the heck is “equity”? You mean I can’t get money to go to Coachella this year? WTF?!

Coachella Dance Guy
No more awesome dance moves at Coachella?!

Luckily, I had a stable job and I was able to keep my position despite the pending Great Recession. This lack of available funds got me curious though. I decided to read some personal finance books to try to get a better understanding of my disastrous money situation. There was one phrase that continually stood out to me during my research … Net Worth.

Net Worth Vs. Income

Now, I had heard the term “Net Worth” before but I never quite grasped the concept. I thought since I’m making $70,000 per year, I must be doing quite well. My net worth must be way up there. Nope.

My net worth was -$50,000. (That’s a negative symbol there, just FYI. So it was really my Net “Unworth”).

Evidently, my accumulation of stuff over the years (including lease cars, an underwater mortgage, student loans and a HELOC) was a negative drain on my net worth figure. Who knew, right? 

How Do You Calculate Your Net Worth

For those that want to know what I didn’t know, you can easily calculate your net worth right now. Total up all of your assets (cash, investments, properties, vehicles, etc) – “what you own”. Then total up all of your liabilities (debts, student loans, mortgages, lines of credit) – “what you owe”.  Subtract your liabilities from your assets and voilà! You have your net worth.

Assets – Liabilities = Net Worth

Here’s a handy calculator to get it done fast.

Change Please

Now, it wasn’t bad that my income continued to rise. In fact, that was the only thing keeping me afloat. From this point forward, I was determined to make a major change in my net worth figures. It would be a combination of increasing my income and eliminating this nasty debt I had accumulated over the years.

Shortly after this epiphany, I focused intently and paid off $50,000 in debt in around 12 months. This rapid change came through reducing my expenses, living on a monthly zero-based budget with my wife and spending well below our income each month. Yes, it required me to get rid of my lease car, not eat out as much and not attend as many concerts, but honestly I was more excited about the direction we were heading in than any of those things I had as a part of my former debt-filled life.

The passion for change and desire for financial freedom continued as the years past in our new marriage. Today, my wife and I are still chugging away at this new net worth focused life of ours. Our net worth has gone from $0 at the time of our marriage in 2010 to $640,000 this year. We also plan to pay off the mortgage on our house in the next few months.

Life is looking bright now for our family. I’m still working hard to increase my income every year, but I now realize that income isn’t everything.

My income can go away in an instant. If they felt like it, my employer could dump me tomorrow for whatever reason they choose. My income would be gone, but my net worth would still be intact.

I feel a lot more secure with a high net worth as opposed to a high salary as well. Better protection and more security sound like excellent reasons to skyrocket your net worth to me. If you’re able to earn a high income AND a high net worth, then you’re really living the dream.  

Where are you looking to improve your finances?

This post was originally featured on The College Investor on June 1, 2017.

Destroying $87k in Student Loans by Avoiding Lifestyle Inflation

Student loans have become so commonplace in our country that everyone seems to be living with them. According to Forbes in February 2017, there are over 44 million people in the US living with student loans. Those loans amount to over $1.3 trillion dollars!

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The Easiest Way to Build Wealth as a Couple

Hello all! Andy Hill here …  We have a new guest post from personal finance author Elle Martinez from Jumpstart Your Marriage and Your Money. Elle’s mission of helping couples improve their money-smart ways is right up my alley. Her article below gives you the skinny on how couples can truly take advantage of a dual income household. Enjoy!

Two incomes are better than one, right?

Marriage can be a beautiful partnership when spouses combine their gifts, talents, and support. Two incomes for a couple can also be a blessing – if used wisely. Let me explain.

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Investing in Rental Real Estate with Cold Hard Cash

Real estate investing has been something I’ve been interested in for a long time. The ability to own a home that provides a monthly passive income and grows in value at a consistent rate over time sounds quite appealing to me.

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Budget Your Way to Wealth (Results) & Protect Your Family’s Future

Last month, I threw down a challenge to start living on a monthly budget. This wealth building habit gives a purpose to every dollar you earn so your money doesn’t go wandering off. That is the essence of a zero-based budget. Every dollar gets a job whether it is for spending, saving, giving or investing. 

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Why More Parents are Getting 529 College Savings Accounts

One sign of hope coming out of the huge student loan crisis lately is that parents are starting to save more for future college expenses. According to Fidelity in 2016, families saving for college has increased from 58% to 72% over the past 10 years. With the cost of college increasing steadily, the more savings we have, the better prepared we’ll all be as parents.

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