Earn more money. It matters more than everything else combined.

by Pop on July 16, 2010

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Little tweaks vs. titanic decisions

I enjoy personal finance blogs a lot. Admittedly, some of the time, what they cover can get a bit redundant. A lot redundant. Mind-numbingly redundant. But hey, the best personal finance advice is timeless. It’s the clever repackaging that makes or breaks someone new who steps into the field.

But of all the disorders that personal finance blogs suffer from, there’s one that’s the worst. And I’m sad to say, I suffer from it too. About 90% of what I’ve written about investing, real estate, the economy, and everything else doesn’t matter nearly as much as how much you earn. It’s not even close. The decision to add gold to a portfolio—which I derided in March—will ultimately only affect a small percentage of your wealth. Refinancing a mortgage when interest rates are only 5% instead of 8% will save you a few thousand dollars until you sell the home. And on, and on. Meanwhile, increasing your income by 10% will affect your savings by a huge amount for the rest of your career.

I haven’t found any research to back this up—which is unlike me—but I’m pretty sure that we focus so heavily on frugality and investing because it’s relatively easy to draw connections between what you do and what you gain. You don’t buy a flat-screen T.V., so you save $800. You move from a mutual fund with a 1% expense ratio to one with a 0.25% expense ratio, so you save $2,000 per year or whatever.

In the meantime, the steps you’d take to earn more money, like asking for a raise or promotion or taking the first steps to starting a side business, are either uncomfortable or don’t have a direct link to the end result. I know how to cut my expenses by 20%. Move to a cheaper place. Cut travel. Don’t eat out. Easy peasy, Japanesey (quoting the Shawshank Redemption).

And yet, how would I increase my income by 20%? Blank page. Vague idea of starting a personal economics blog that rises to must-read. Freelancing as a…? I’ve had a blank page for a while and am just getting off my ass to change that. I think it’s extremely important that you do it too.

Your job as an investment.

Imagine your investment portfolio. You’ve been reading personal finance stuff for a while. So you’re probably in a bunch of low-cost index funds that own literally hundreds of stocks. You would laugh at me and leave derisive comments if I said you should stick it all into one equity.

But that’s basically the approach most of us take to our jobs. We have one source of income. If the job disappears, the income disappears. Sometimes, you get lucky, and sink your skills into a company like Google or an SAS, which rarely has layoffs and compensates employees well. Other people don’t get lucky, and sink their skills into a BP, automaker, or, more recently, a cash-strapped public government. They’re finding out the drawbacks of undiversified income right now.

This idea of viewing yourself as a valuable investment isn’t new. Moshe Milevsky, a finance professor at York University in Canada, has been telling people to include themselves in their investment portfolios for a while and invest in other assets accordingly.

Think of it this way. Imagine being a mortgage broker in 2004. Pretty sweet gig, right? You get commissions based on every mortgage you arrange and get even bigger payments if it’s an expensive house or if you push the buyers into adjustable mortgages. Real estate is brisk, and you’re making more than $100,000 per year.

Fast forward to 2009, and you’re making nothing. Maybe $40,000, if your job included a base salary. Your firm has likely cut down on the number of brokers it employs. You might be out of a job.

Now imagine being a tenured economics professor in 2004. Nice job, nice hours, and making $70,000 to $100,000, depending on your tenure and what university you’re at. Now fast forward to 2009, and you’re making…the same. Maybe a little more if you got a cost of living adjustment. You still have a job, because that’s the deal. No peaks or valleys in income.

Milevsky would argue that the unstable but high potential broker income is “stock-like” while the professor income is bond-like. His book, Are You a Stock or a Bond?, is a fascinating look at the subject. The general summary: Young people should treat their future earnings potential as part of their portfolios. In a high risk profession? Balance that with more conservative investments. Are you a tenured professor? Take a risk on stocks.

So how do you protect and grow the most valuable piece of your wealth?

1. Diversify. — As mentioned above, the only way to truly diversify your earnings power is to have more than one source you can draw on for money. Sure, at its most advanced stage, this can take the form of a side business. But anything you can do to generate income, such as freelancing or transforming a fun hobby into a fun hobby for profit, helps to keep your income from going to zero.

Easier said than done, I know. Luckily, Ramit Sethi one of the best bloggers on the subject of earning more money, happens to be running a series on starting a freelancing business, right now.

2. Increase your earnings. — This is something I’m going to address at much greater length soon. But just keep this word of advice: Your success will increase in direct proportion to the number of uncomfortable conversations you’re willing to have.

We introverts (extroverts can skip to the next point) have a tendency to sit at our desks and hope our hard work will get noticed. That does happen every once in a while, but simple asking for a raise or a promotion after a success at work will bring the raises and promotions much more quickly. And even if asking doesn’t bring it immediately, it at least opens the conversation with your boss about what you can do to advance. That’s much better than stabbing in the dark.

3. Reduce your risk. — Although I know quite a few commission-based salespeople who didn’t follow this advice, that mortgage broker I referenced above could have smoothed out his income. Earnings made in one year don’t have to be spent in the same year. If you have a job in a volatile industry, keep on hand at least a year’s worth of living expenses in an emergency fund. On top of that, especially if you have dependents, consider getting disability insurance. Your work probably only gives you coverage for a few years. Meanwhile, a disability could cripple your most valuable financial asset for your entire life.

Anyway, something to think about.


{ 13 comments… read them below or add one }

John Hunter July 16, 2010 at 9:50 am

Earning more is an important and simple idea that is ignored far to often. Simple, doesn’t mean, easy, just easy to understand. I agree this is something people should definitely include in their personal financial planning.

There is a important caveat to remember, people earning a lot of money often have large financial problems and go bankrupt. Earning more if you borrow more than you earn and rely on ever increasing earnings can make you even more venerable than those earning less. A significant factor is how likely you are to replace your current earning if you need to find a new job.

There is also another concern to watch for – don’t become a slave to your desire to earn more. The reason to earn more is to improve your lief long situation. If you sacrifice what you enjoy too much it becomes a bad trade off. Short term sacrifices may well be wise. But many people find themselves in decades long sacrifices to try and get ahead. This isn’t a good plan.

Victoria - Ozarks Crescent Mural July 16, 2010 at 1:21 pm

When you said, “And yet, how would I increase my income by 20%? Blank page,” it made me think that I’ve filled in that blank page with quite a lengthy list. I was so tired of all the scammy work at home stuff out there that I created a project of my own. It’s all legit and other than some AdSense (which has never paid off for me), it’s my gift to the community. It’s called the Work at Home Site Directory (http://sites.google.com/site/workathomesitedirectory/) and I know that I could have used it. It took me over a year to find viable ways to make money from home without selling anything or ripping anyone off.

Jacq @ Single Mom Rich Mom July 16, 2010 at 2:42 pm

Making more money turned out to be THE factor that helped me be able to retire somewhat early at a decent income (not living with extreme frugality). At the same time, I just didn’t inflate my lifestyle and didn’t go all crazy frugal because I didn’t have to – it was an extremely easy recipe to follow once I figured out what I had to do.

But it comes down to being willing to do it. You may be ready to make more, you may be able to make more – but are you willing to do what it takes? Most people aren’t.

Rob Bennett July 16, 2010 at 5:45 pm

Saving can help you earn more.

When you have money in the bank, you are more open to taking risks in your career. You aren’t as worried about being fired because you are not as financially vulnerable. And you can afford to accept jobs with small pay in the short term but huge long-term potential (perhaps a start-up).

Taking on risk can pay off in careers just as it can in investing. And you can afford to take on more risk if you have a good bit of money put aside.


Pop July 16, 2010 at 7:33 pm

Great point. I bet that even with a lot of savings, people get stuck though, especially with unemployment so high. Our minds often default to worst-case but improbably scenarios, and an emergency fund never seems big enough to take that first step toward freelancing or changing careers or whatever your goal is. I know you retired early. How did you get over that?

Pop July 16, 2010 at 7:36 pm

Hey Jacq, I’m just about to stop by your blog so maybe I’ll find out there, but what did you do to earn more money? I bet I’m not the only one who wants to know.

Pop July 16, 2010 at 7:41 pm

A significant factor is how likely you are to replace your current earning if you need to find a new job.

I think a lot of folks in unionized manufacturing jobs who stayed at the same employer for a couple decades are finding out about this about now. They’re simply not going to be able to find many jobs in the high-five figures or low-six figures that require the skill sets and education they have. Thanks for the comment.

Rob Bennett July 17, 2010 at 12:29 pm

an emergency fund never seems big enough to take that first step toward freelancing or changing careers or whatever your goal is. I know you retired early. How did you get over that?

I went over the numbers over and over and over again, Pop. You are right in what you are saying. Once you leave a high-paying job, you usually cannot go back to it. So it’s a big step. My wife and I talked it over for years and examined every possible scenario and did lots of number exercises.

The fear comes from not knowing. You overcome the fear by digging in and developing a realistic confidence. That said, there are no guarantees. You can study this stuff in great depth and still get killed by surprises. I have had some nasty surprises. So even my case (where there was a lot of prep work done) shows this to be so.

My biggest fear is that I will reach the end of my days without having seriously tried to accomplish the things I had wanted to accomplish. So I have a counter-fear to balance out the money fear. There’s a Battle of the Great Fears going on in my mind at all times! I’m joking a bit but I really do think fear can be a motivator as well as something that holds you back from taking action. I try to use fear as a motivator.


Stanley July 17, 2010 at 9:44 pm

ISTR that there were more millionaires at the end of the great depression than at the beginning. C’mon folks, let’s get creative! Hard times make for big problems. Big problems beg solutions. Solutions earn money. Provide the solution, pocket the money.

I’m working on an e-book that addresses a money woe that a lot of people are having at the moment.

It’s time to get creative and innovative and, most of all, active.

Jacq @ Single Mom Rich Mom July 23, 2010 at 12:10 pm

Hey Pop,
Missed your comment above – but for about 18+ months, I worked two jobs – one regular, and one about 50% capacity that was a good gig making a really good hourly wage. Lots of work, but I can’t discount the luck factor and being in the right place at the right time. Funny thing is, I’ve been in the right place at the right time a few times, so I’m guessing it isn’t all luck. :-) If I were to advise anyone younger than me who wants to do the same, it would be to get into a field where consulting is common – finance, engineering, IT…
But even before that, I tried to look for jobs where if you had the right boss, normal corporate “rules” on bonuses and promotions didn’t apply. I wasted a lot of years being scornful of the corporate games when I would have been way better off to play the game in a way that was in accordance with my principles – I guess I was following Seth Godin’s “Linchpin” advice years before he wrote it. :-) I’m going to try and put more of this stuff on my blog once I’m done traveling at the end of August. I guess I thought it was too common and didn’t realize people would be interested.

Bender July 29, 2010 at 6:34 pm

More nice work from you!

Regardless of what one thinks of Nassim Taleb he always has a some interesting thoughts.


I found his advice to stay out of equities and invest in your own business interesting. Tying this in with your more recent post on the “new normal”, would be an interesting next step.

Pop July 30, 2010 at 12:15 am


Yeah, definitely interesting. Though to be fair, it creates the danger of relying too much on your own earning prospects to grow your assets. Sure, it feels safer to invest in your own business, but sinking more into a primary income stream seems like it would just make you vulnerable to unexpected disasters in your business. A Lehman Bros’ bankruptcy can sink the stock market but a lawsuit from an angry patient, if you’re a dentist, can sink your income stream just as well.

K Smith August 2, 2010 at 2:45 pm

Even in the best of times, being an employee is a huge drag on creating and accumulating wealth. The tax advantages of owning your own business – the ability to deduct expenses like home office costs, health insurance, office supplies, cell phone, vehicle expense – add significantly to income.

Based on my assessment of the near and long term – a flat or contracting economy – the potential for income growth is much greater if you own your own business. In a flat or contracting economy, those who have money to spend will seek the highest quality their dollar will buy. Those who provide the highest quality will be in highest demand. Owning your own business maximizes control over quality.

Jacq@SingleMomRichMom’s idea of going into a consulting-friendly business falls right in line with this idea.

If your business is set up in a well structured limited liability corporation – an LLC – you can be virtually judgment proof. Lawsuit-happy plaintiffs drop lawsuits against well-structured LLCs once they learn how they will be impacted if a judgment is awarded.

LLCs can withhold payment on judgments. While payment is withheld, judgments must be booked by the plaintiff as an uncollected accounts receivable, and taxes must be paid on them. This means getting a judgment creates a tax liability and ends up costing the plaintiff money.

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