How Much You Earn isn’t The Most Important Thing

We South Africans love to talk about how those around us are doing, especially financially. “He is doing so well. They are paying him millions.” This is one of the common quotes you hear in various forms around the water cooler at the office and around the braai on the weekend. However, what someone is earning is not the most important thing. It certainly helps to be earning more, please don’t get me wrong, but it is not the be all and end all. What is the most important is what you do with what you have.

Here are three true stories to illustrate what I mean:

Two colleagues

Two ladies work together. The one is the manager of the other. She is earning a top salary and is a very important person in the company. The other is merely a member of her staff and is earning a middle of the road salary. The manager is in her early fifties and at her current rates of contribution to her investments she will not be able to retire successfully. Her employee is in her 60’s and is set to retire with sufficient funds to last her until the age of 100. She will be able to retire successfully and will be able to replace her after tax income 100%.

Conventional wisdom says this doesn’t make any sense. The “rich” manager is earning nearly three times more than her employee, and yet she is “poor”. The lady who many would consider “poor” is the “rich “one. The key is what they have been doing with their money. The rich manager has been making poor decisions. She has sporadically contributed to her pension fund over the years. She spends nearly all her money every month on a whole host of things. She lives in a magnificent home (that is fully bonded), wears the latest fashions (and services several monthly debt repayments) and has many luxury vehicles (all of which are funded by debt).

In contrast her poor colleague has been making rich decisions. She saved with her husband for a large down payment on their first house. She has always stayed in the same house if possible and has only moved when her work took her elsewhere in South Africa. Every time she has moved, she has taken less debt in buying her new home. She now has no debts and prefers to pay for her major purchases in cash. She drives a 10-year-old Polo hatchback and her husband drives a small second hand bakkie that he uses for his construction business. She has modest voluntary investments and a modest pension relative to many others out there (and her manager), but because she has worked hard to build her wealth and lived a humble life she can now retire successfully.

The successful business couple

A couple in their middle 40’s are highly degreed, qualified and respected business people in the private sector. Their collective earnings are astronomical. They have been working extremely hard for more than a decade and yet they have no real assets to show for it. Their personal finances are a mess, which is surprising as they both work in financial services. Aside from their home (90% bonded), there is not much to write home about.

The Director

A director at a large business works hard and earns very well. He gets an executive level salary, share options and bonuses. The company was doing so well that he was receiving share options and large bonuses every year and every year he would spend them as if they were part of his normal salary. He would max multiple credit cards and take out personal loans and then when his share options and bonuses arrived at the end of the year, he would squash them. This allowed him and his family to live a much higher lifestyle. The problem was that share options and bonuses were discretionary and were dependent on the company performing well. The company began to struggle, and they were unable to pay the director the share options and bonuses he was accustomed to. He was in trouble. Left with maxed out credit cards and personal loans that he was unable to repay and a lifestyle that required him to spend tens of thousands of Rand more than his normal salary each month.

The first and most important steps to financial freedom

There is a sketch from world renowned Financial Planner, New York times columnist and author Carl Richards that hangs in our office. It says, “BUDGETING = AWARENESS* (*AND WHO DOESN’T WANT THAT?)”.

Save and invest first and spend the rest (living within your means) is one of the key principles of financial freedom. Tracking your spending and having a budget is how you do this. Having awareness and structure will put you in control of your personal finances. You will be able to save and invest far more and with greater consistency. 

What you earn is not the most important thing. It’s what you do with what you have that matters most. 

Written by Brendan Dunn for Honest Money Podcast

Portfolio Management Support at Galileo Asset Managers