Ever see the movie “Rush Hour 2?” There is a part where Chris Tucker and Jackie Chan go to see Don Cheadle to see if the bad guy in the movie had spent any counterfeit money in his restaurant. Don Cheadle says yeah, and then Jackie asks if he still has the bills. Don Cheadle’s response is classic.
“Still got my lunch money from the 3rd grade.”
I love that line. The character respected money, saved and obviously had something to show for his work, going back all the way to the 3rd grade. He had successfully converted past earnings into actual wealth.
Working for money is really hard. My first job was at Burger King when I was 16 years old. My day basically went like this. I got up at 6:00 AM, went to school, came home around 3:00 PM, did my homework, ate something and then went and worked from 5:00 PM – 10:00 PM slinging burgers, cooking fries, waiting on customers and cleaning bathrooms. It was hard work and I came home exhausted and smelling of fryer oil. All for $5.15 an hour.
When you work that hard for so little, you build an appreciation for money. You think to yourself if a purchase was worth it before parting with your precious money. If a trip to the movies and popcorn cost $15, you think if it really is worth trading 3 hours in the back of a miserable, hot fast food restaurant to earn the privilege of watching that movie in a theater versus watching TV at home for free. Whatever it is you do with that money, you want to have something to show for it, otherwise it’s a big fat waste.
Working in the corporate world is hard too. Sure you make more, but the hours can be long, the work can be stressful and there may be politics and drama you have to deal with. Again, if you are going to trade such a significant portion of your life for money, you better have something to show for it. I had a moment like that in 2015 when I checked my net worth for the first time and realized that I had worked for 13 years and had little to show for it.
The key is to actively convert what you trade your time/energy for (earnings) into something lasting (wealth) that can help you accomplish your goals (in my case financial independence). This takes saving, shrewd investing and some luck along the way. But how do you know how efficiently you are converting your earnings into actual wealth?
The trick comes from figuring out your net worth as a percentage of your total earnings. For example, if you have earned $500K in your career, and your net worth is $50K, you have converted 10% of your earnings into wealth. And if you look at it in terms of the TIME it took to create that wealth, you would realize that 90% of your time was spent earning money that is 100% gone forever and can’t help you in the future. Sobering fact.
Back in 2015, my ratio was 13.8%. It made me sad that 86.2% of all the money I had made up to that point in my life was gone forever. But it also helped to motivate me to change my actions. I am happy to say that 6 years later I have increased that number to 40.5%!! That feels a lot better and makes me feel like my hard work has actually started to BUILD SOMETHING that will LAST. My goal is to one day see that ratio go over 100% which would mean I had saved MORE that the total of everything I had ever earned.
So how can you figure out how much of your earnings have been converted into wealth? It’s probably easier than you think!
Step 1 – Calculate Your Net Worth
Hopefully you are tracking your net worth on a regular cadence already, but if not, it’s pretty straightforward! First calculate the sum all of your assets (bank accounts, investments, real estate equity, cash, etc.). Next, calculate the sum of all your liabilities (credit card balance, mortgage balance, car loan balance, etc.). Finally, subtract your total liabilities from your total assets to get your net worth.
Step 2 – Calculate Your Lifetime Earnings
Ok, so how are you supposed to do this? Do you need to have saved every pay stub from years and years of working at various places? Fortunately, there is a much easier way! The United States Social Security website actually give you your lifetime earnings all the way back to your very first job! Here is how to get it.
- Access the Social Security site and create an account. You will need some basic information to sign up including your social security number, date of birth and address.
- Once you have access, you will land on the My Social Security dashboard. Click “Review your full earnings record now”
- You will see a chart with your reported earnings for your entire working career! Add up the “Taxed Medicare Earnings” column. This is your total lifetime earnings.
Step 3 – Calculate Your Earnings to Net Worth Ratio
Here is the easy part. Take your net worth from Step 1 and divide it by your lifetime earnings from Step 2 and multiply by 100. This is the percentage of your earnings that you have converted to wealth!
When you first see this number, you may be a bit disappointed. But don’t worry, you can totally take action to make it way better! Track this metric along with your net worth monthly and feel the satisfaction of small victories on the road to financial independence!
Additional Reading:
There are a ton of amazing articles on the value of the earnings to wealth conversion ratio out there. Some of my favorites are Your lifetime wealth ratio (and how to calculate it) from JD Roth at Get Rich Slowly and How Much Should My Net Worth or Savings Be Based On Income? from Financial Samurai. Check them out!