Has Your Earning Capacity Saturated?

Published: May 1, 2015 at 3:00 pm

Last Updated on

Has my earning capacity saturated?. Is this all that I am going to earn for the rest of my life? Do I need to erase some of my dreams because I am never going to earn enough in order to achieve those?

These are some of the most unsavoury questions in personal finance. Most people confront them at some point in their lives. The answers are typically not pleasant. At least that was the case for me.

As a boy, I knew little about the importance of money. I demanded very little from my parents. What I wanted, I got. So mine was a happy childhood.  Money did not drive my choice of education. I did not choose a degree based on career prospects. I chose what I liked or what I thought I liked.

I never had any kind of notion about what a ‘good’ salary was.  I remember the reactions of my classmates when I told them my research fellowship. Some of them went ‘is that all? How do you manage?’ To be frank, I did not know what ‘manage’ meant. I would draw my salary, give it to my parents and did nothing more.

I was 31 when I got a tenured appointment and for the first time got a ‘respectable salary’ (meaning my friends would not go, tsk, tsk!)

A year or so later, during a discussion about how scientists behaved in certain labs, one my colleagues made an observation which I would never forget. He said,

these guys found out pretty late in life that their salaries are not commensurate with their dreams. Beyond expenses and essential financial goals (child’s marriage, education etc.), these guys cannot buy anything else. They don’t have the cash flow. They salaries have saturated. So they are frustrated and it shows in their work.

Those words shook me up pretty bad. For the first time in my life, I  realized the importance of holistic money management. The need to take into account future financial goals and if we will have the necessary cash flow to fund them.

The following summer, I spent a lot of time staring at cash flow charts in Excel, answering:

If my salary did not grow beyond the typically expected 8-10% growth, will I be able to invest enough for my all my essential financial goals?

I have been doing this exercise (now fully automated with financial plan creator) each year since then.  You can also use the robo advisory template

When I did it for the first time, I had only retirement as the essential goal. Since then, I have become a parent and now have my son’s education and marriage as additional essential goals.

Thankfully, due to the 6th pay commission, my salary increased and I could accommodate the additional goals.

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However, I have not be able to factor in my dreams, desires or non-essential goals (relatively speaking) for the last 9 years.

I think it is safe to say that my earning capacity has saturated.

I would not be surprised if many others are in the same boat. For most people, there is a limit to how much they can earn and therefore, a limit to how much they can realistically want.

Yes, yes, we must never give up on my dreams and wants, be optimistic, strive for it as long as we can, it is never too later and all that sort of thing, but who are we kidding?

Correct me if I am wrong, I think for most people, earning potential is determined in a narrow time window, typically after school.

How much we earn is decided more often that not decided by what we choose to read and where we choose to work.

An income over and above that is typically rare.

The moment when we holistically realize what our present and future purchasing capacity is going to be is a watershed momement.

If you have not though along these lines, I urge you to ask the questions that I did with the financial plan creator or the robo template this weekend.

It is important to not lose hope. Let us hold on to it with perspective.

Perspective
pic credit: pix shark

 

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About the Author

Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com

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20 Comments

  1. Dear Pattu Sir, Thanks for the excellent post. These are the kinds of post people should read. Believe me ever since I started following your blog and fb group:aasan ideas for wealth, the perception towards life has changed.

    And, let me quote the golden words again,
    “It is important to not lose hope. Let us hold on to it with perspective.”

    Keep inspiring, thank you.

  2. Dear Pattu Sir, Thanks for the excellent post. These are the kinds of post people should read. Believe me ever since I started following your blog and fb group:aasan ideas for wealth, the perception towards life has changed.

    And, let me quote the golden words again,
    “It is important to not lose hope. Let us hold on to it with perspective.”

    Keep inspiring, thank you.

  3. Another awesome article Pattu Sir,

    I think besides calculation, our people’s mentality saturated. Whatever is the earning, people can’t able to decide whether this is enough or not. I can see that few of my friends working in Microsoft are earning 4-5 times more than me. But whenever I met them, they are confused as the earning is not enough to buy a new flat, when I did that with my half of the current salary 3 years back.

    But I am also surprised many times that, few of my friends getting less salary than me are very organised in life as they follow the golden rules of investment & expenditure.

    Your articles are like mirror to an individual and I can say that after following your blog, I have seen enough of me and I am happy that I have started learning and shifting my focus towards savings rather than typical life demands. 🙂

  4. Another awesome article Pattu Sir,

    I think besides calculation, our people’s mentality saturated. Whatever is the earning, people can’t able to decide whether this is enough or not. I can see that few of my friends working in Microsoft are earning 4-5 times more than me. But whenever I met them, they are confused as the earning is not enough to buy a new flat, when I did that with my half of the current salary 3 years back.

    But I am also surprised many times that, few of my friends getting less salary than me are very organised in life as they follow the golden rules of investment & expenditure.

    Your articles are like mirror to an individual and I can say that after following your blog, I have seen enough of me and I am happy that I have started learning and shifting my focus towards savings rather than typical life demands. 🙂

  5. HI Pattu – Thanks for the thought provoking article. I agree with what you say but offer a different perspective. Earning potential can change later in life if one is in a career where new skills are in high demand. But then these skills become obsolete as well (Hype Cycle of skills). So in order to keep increasing earning potential one has to keep learning new skills, often with a steep learning curve.

    Thanks

  6. HI Pattu – Thanks for the thought provoking article. I agree with what you say but offer a different perspective. Earning potential can change later in life if one is in a career where new skills are in high demand. But then these skills become obsolete as well (Hype Cycle of skills). So in order to keep increasing earning potential one has to keep learning new skills, often with a steep learning curve.

    Thanks

  7. The pursuit of something more, something bigger and something extra ordinary is what makes us humans! Else we’d remain the grass eating animals roaming in green pastures content with what we have.

    However… there’s a big difference even among people. What precisely drives you is the next step of introspection. If its negative qualities that drive you like greed, jealousy etc then your endeavors will not give you any satisfaction anyway even if successful. On the other hand if its some kind of positive sentiment like a genuine will to help people, developing a world class product, or just plain efforts out of inborn enthusiasm.

    And that makes a world of difference internally.

  8. The pursuit of something more, something bigger and something extra ordinary is what makes us humans! Else we’d remain the grass eating animals roaming in green pastures content with what we have.

    However… there’s a big difference even among people. What precisely drives you is the next step of introspection. If its negative qualities that drive you like greed, jealousy etc then your endeavors will not give you any satisfaction anyway even if successful. On the other hand if its some kind of positive sentiment like a genuine will to help people, developing a world class product, or just plain efforts out of inborn enthusiasm.

    And that makes a world of difference internally.

  9. EDIT:
    more often than not
    watershed MOMENT
    If you have not THOUGHT along these lines,

    Q:Has my earning capacity saturated?

    >>> Isn’t the whole purpose of personal financial planning is that our incomes may stagnate at one point and from that point on our investments should yield us $ than our salaries?

    Q these guys found out “pretty late in life” that their salaries are not commensurate with their dreams
    >>> Refer next point. either salary has to go up or dreams have to come down.

    Q Correct me if I am wrong, I think for most people, earning potential is determined in a narrow time window, typically after school. –

    >>>DISAGREE. It is what you do from 21-30 or pretty much before your marriage that determines it. Middle class thinks about income. Rich think about Net worth. Sadly most of us fritter away our 20s financially or get married.

    Q How much we earn is decided more often than not decided by what we choose to read and where we choose to work.

    >>> YES, initially and NO in the long run.
    >>> @21, a BTech from IITM campus placed@ Google may have more income than any other. I have also have known BA (English Literature) guys starting their careers in AVM studios making it big 🙂

    1. Thanks for pointing out the terrible mistakes. Corrected.
      >>> Isn’t the whole purpose of personal financial planning is that our incomes may stagnate at one point and from that point on our investments should yield us $ than our salaries?
      If that could happen, great. For that one will have to invest a lot more. People usually plan for ianvestments to take over only when income stops.

      Q Correct me if I am wrong, I think for most people, earning potential is determined in a narrow time window, typically after school. –
      Agree. I should have worded it better.

      Q How much we earn is decided more often than not decided by what we choose to read and where we choose to work.
      There will always be exceptions but to a large extent it is decided by education and work choice.

  10. EDIT:
    more often than not
    watershed MOMENT
    If you have not THOUGHT along these lines,

    Q:Has my earning capacity saturated?

    >>> Isn’t the whole purpose of personal financial planning is that our incomes may stagnate at one point and from that point on our investments should yield us $ than our salaries?

    Q these guys found out “pretty late in life” that their salaries are not commensurate with their dreams
    >>> Refer next point. either salary has to go up or dreams have to come down.

    Q Correct me if I am wrong, I think for most people, earning potential is determined in a narrow time window, typically after school. –

    >>>DISAGREE. It is what you do from 21-30 or pretty much before your marriage that determines it. Middle class thinks about income. Rich think about Net worth. Sadly most of us fritter away our 20s financially or get married.

    Q How much we earn is decided more often than not decided by what we choose to read and where we choose to work.

    >>> YES, initially and NO in the long run.
    >>> @21, a BTech from IITM campus placed@ Google may have more income than any other. I have also have known BA (English Literature) guys starting their careers in AVM studios making it big 🙂

    1. Thanks for pointing out the terrible mistakes. Corrected.
      >>> Isn’t the whole purpose of personal financial planning is that our incomes may stagnate at one point and from that point on our investments should yield us $ than our salaries?
      If that could happen, great. For that one will have to invest a lot more. People usually plan for ianvestments to take over only when income stops.

      Q Correct me if I am wrong, I think for most people, earning potential is determined in a narrow time window, typically after school. –
      Agree. I should have worded it better.

      Q How much we earn is decided more often than not decided by what we choose to read and where we choose to work.
      There will always be exceptions but to a large extent it is decided by education and work choice.

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