Since today is the filing deadline for 2018 tax returns here in the US, I thought I would discuss why I am psyched about earning less last year.

Before I get into why I am pumped to have earned less money, a little background as to why I earned less may be in order. Last year was the first full year I had at a new job but that meant that I wouldn’t be receiving any bonus (or variable performance based pay, as they like to call it now) for the previous year’s work. Due to this, my pay was a bit below what it had typically been in some years past.

Many may look at this as a negative, that they have less money to spend or save as a whole and there is nothing to cheer about. All things equal in a perfect, untaxed and un-lobbied world, that may be true but unfortunately that is not the world we live in.

You see, that lower income knocked me back into territory I have not been in for a while: being able to contribute to my Roth IRA. This may not seem very exciting and yes, be good for my potential retirement down the road but conventional wisdom says I shouldn’t be that excited for it right now.

A Little History

However, after having been out in the world for a while, I realize I am not exactly a normal person. I was raised with a strong sense of hard work and savings by my parents. They worked hard at their respective jobs and saved diligently. As I got older I began to notice though, there was one thing that set them, and many other rich people apart from the average Joes who work and just put their money in the bank: they understood the power of compounding.

I can remember being 6 years old and having saved up my allowance, my parents telling me I needed now to have a bank account so that I could start to earn interest. A small percentage paid to me every year when I had $100 in the bank didn’t sound like much but it was the start of a conditioning in the way I look at money.

By the time I was in high school I remember my parents denying me all these material things I wanted, but then opening up a Roth IRA for me. I couldn’t understand why I was being denied something now so that I could potentially see more money one day again when I am really old. I had plenty of time to make money and be rich I thought, I didn’t need to worry about a couple of hundred or even thousand bucks for my retirement right now.

I didn’t really understand the significance of that move until I had studied economics and finance a few years later and realized that every dollar I put away very young had the potential to be $100 when I was 65 or older. Once I realized this and the benefits of a Roth IRA I became much more greatful and also sought out ways that I could increase my wealth through means like this.

It takes a special mentality to put money away in the market and not be able to think about it for another 20-40 years. My rationale that feeds my motivation uses a very logical path. What is rationale is based on market observations over the long term which are as follows:

• The S&P 500 has grown, on average 10% annually over the past 100 years if you include reinvested dividends.
• Although inflation has bounced around, for the past 20 or so years, the Fed has had a target inflation rate of 2% annually.

A Roth IRA is an after tax retirement vehicle, meaning since you have already paid taxes on this money, as long as you don’t touch it until retirement, you will never have it taxed again.

There are no required distributions on a Roth IRA and you can even pass it on to your children. Although your children will be required to take distributions described here, those distributions will also never be taxed.

There are a host of exceptions besides retirement that allow you to take distributions out without penalty including: medical insurance, a first time home down payment and college expenses for you or a child. More detail can be found here.

If you inherit your IRA and want to go the extra mile, you could take those required distributions and roll them into your own Roth IRA.

As I described in one of my previous posts though, IRAs were intended as retirement vehicles for middle and working class people so there are strict income limits on those who can contribute. Unfortunately it seems to be the rich and their offspring who take advantage of these vehicles. While I wouldn’t say my background is of a rich person, I did have a very financially astute family. Probably much more so than the average person. They were able to start me off with a Roth IRA at a young age and push me to contribute so that I could see those benefits later.

So What Will It Mean?

There is a certain psychology to saving that, more so than other things, I think I have mastered, and that is delayed gratification. Combine this with compounding over many years and it can be a powerful wealth creator.

It’s still surprising to see in action. I saw a post in Instagram the other day that said when Wareen Buffet was 50 years old he was worth about $300 million. Now he is worth something like $85 billion. That means at 88, 99% of his current net worth came in his last 38 years.

Now take that example and apply it to me putting the maximum Roth IRA contribution towards a 10% annual return and see the results:

• Now – $5,500
• In 10 Years – $14,265
• In 20 Years – $37,001
• In 30 Years – $95,971
• In 40 Years – $248,925

These are a little misleading so accounting for 2% inflation we have the following in today’s dollars:

• Now – $5,500
• In 10 Years – $11,703
• In 20 Years – $24,841
• In 30 Years – $52,993
• In 40 Years – $112,737

So rather than looking at it as denying myself $5,500 now I think of it as giving myself 50 or 100 thousand dollars 30 to 40 years from now. Even if I don’t use it on myself, that money could go to someone’s college or make a difference in someone’s life one day.

Conclusion

Even if it isn’t money for your own personal benefit that drives you, think of the difference it could make in someone else’s life down the road. You could build a school in Africa with that type of money or help someone open up a business and realize their dreams. These are potentially life changing and amazing experiences, things that are the real essence of life and joy, and you’re going to give them up for…. Coachella tickets?

This is why I am excited people, it’s a great chance to add to my best egg and also make the world a little bit of a better place down the road. Next time you earn less, as long as you can provide for yourself and your family, don’t worry. Take a different view of all the potential positives that are out there for you. By earning less last year, I just gave future me $100k, how is that losing?

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