Income Bias vs Purchasing Power
Purchasing power is not the same as income. The amount of income one receives for their product or service determines one’s income, but it does not define the amount of wealth they have accumulated. Many people define someone making a decent amount of money by how many figures they make per year. Majority of people, through conversations, will frame upper class as anything more than 250k per year. No one necessarily talks about how many assets they’ve accumulated because net worth is more private than the amount of money one makes per year. We call this the Income Bias because it focuses the attention on how much one should make, but doesn’t talk about the amount of purchasing power one attains from investing and accumulating wealth.
It really isn’t about the income.
There are about 56.1 million millionaires globally, 22 million millionaires are located in the United States, and 1/3rd of those 22 million millionaires in the US, have never made six-figures in their lifetime. The importance of this research shows that it is not the amount of income, but what an individual does with their money that makes the difference.
The amount of money someone makes per year will never translate to how much they will able to make in the future. Income can shrink or expand depending on inflation or deflation, but in an inflation environment, it can shrink one’s lifestyle significantly. Income can allow one to live comfortably, but it will not help them attain anything significant in the long run if they do not understand the concept of purchasing power.
So what is purchasing power?
Purchasing power is defined as what your dollar is/can be worth in the future. Those who have been investing for the longer term have seen their money grow as assets continue to increase in value. Assets that increase in value are growing the original amount of capital to a higher value to be sold at. If the rate of return is outpacing inflation and more, then they will be able to attain other assets classes such as equities, commodities, cryptocurrency, and real estate. The importance of this concept is vital to attaining any amount of wealth because it allows one to “snowball” once they understand how to use certain asset classes to their advantage.
Anyone with a W-2 will eventually get capped on their salary/income. This cap will weigh heavily overtime as asset classes start to grow faster than one earns. A great example of this is the Silicon Valley, also known as the Bay Area, where majority of the homes are over a million dollars. Of course these homes weren’t always worth a million, but homes bought back in the day, have definitely kept up with the amount of purchasing power for those that got in early.
Keep it simple.
Don’t get sucked into the façade of a high-income lifestyle. It is easy to spend more than you make and live above your means - causing you to accrue debt rather than assets that will appreciate over time. Income is not typically transferred over to any family members and will end when that individual dies. Wealth, however, can be transferred over to family members, and will usually preserve the capital from the original purchase price.
Not having any assets right now isn’t a problem. It’s usually the lack of education and execution that will force an individual to become another statistic. Habitually saving, investing, and lifelong learning can lead the process to attain wealth. So if you haven’t, try to start dabbling in saving, investing, or accruing assets. You don’t have to start big, small steps and changes in your habits can snowball into millions.
“The best time to have planted a tree was 20 years ago, the next best time is today” - Confucius
“Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” - Charles Dickens from David Copperfield
Retire By Investing is on a mission to help others increase their free time through financial education. This substack does not provide financial advice of any kind. We do not sell or manage financial investments or vehicles. We are not licensed individuals and are not liable for any financial decisions you make. Please do your own due diligence and consult/seek your financial advisor regarding any decisions. Thank you. Have a great day!
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