Geoff Thompson, Synergistic Life Services: What is Earning Power?
Throughout our working lives, the money we earn is expected to go a long way. Our incomes pay for places to live, transportation, household expenses, and lifestyle aspects like travel or activities. These incomes even go toward paying for educational and medical costs for our children. Working to earn a living is something most people do in their lives, and they may work for 30, 40, or even 50 years before retirement.
What happens when you stop working? Will the money you made during your career — including savings set aside for retirement — be enough to secure your financial future? It’s very important to understand Earning Power in order to best prepare, according to Geoff Thompson, the CEO of financial firm Synergistic Life Services.
Earning Power Defined
When talking about finances, a common term one might come across is “earning power”. In the simplest terms, this means a person’s ability to earn an income while he or she is working. Income can come from several sources, including:
- Investment income from stocks, bonds, real estate, or other assets
- Job income (the salary you bring in as you work)
- Your spouse’s income (salary, bonuses, investments)
- Other income sources like monetary gifts, bonuses, pensions, and retirement funds
Your current and future earning power can do a lot of things, and few people truly understand how earning power works without some illustrative numbers. Say, for example, that a 30-year old couple brings in a combined salary of $100,000 a year for their entire careers. Without any raises, this couple will earn $3.5 million over the course of their careers. Of course, the more money you make, the greater your earning power. A couple that earns an average of $500,000 in combined salary may make as much as $20 million over a career! Even a smaller combined salary, such as $50,000 over a lifetime career, can bring in $2 million, and that’s without ever receiving a raise.
With these illustrative figures in mind, you can see that working and earning a living is a person’s most valuable asset. With an earned income, many things are possible, including achieving financial goals and setting aside money for retirement. Without a steady source of income, everyday life becomes much more difficult.
What Do You Want to Do with Your Earning Power?
When thinking about finances, only you can decide what you wish for when it comes to your earning power. This is directly related to how you want to live your life; both earning power and lifestyle are linked tightly. You will have many decisions in life on what you want to do with your money and how you want to enjoy life, such as:
- Do I want to live for today, or keep an eye on the future with savings and retirement investments?
- Do I want to own a house? Where do I want to live? What sort of house would I buy?
- Do I want to work for myself at some point by establishing my own business?
- Will I pay for my child’s education? If so, what sort of college or university will they go to?
- Do I want to travel, or engage in a leisure activity?
- Do I want to start and maintain a collection of valuable items, such as cars, jewelry, or historical artifacts?
- What sort of lifestyle do I envision for myself?
Again, only you can provide the answers to these questions. More importantly, only your earning power can help you achieve your goals and dreams; doesn’t it make sense to want to protect that financial potential?
Maximizing Your Earning Power
Financial experts know that the money we make as income is expected to cover our short- and long-term expenses. This income is asked to do so much, from funding retirement plans to paying for our homes, our cars, and our household needs. With all of those potential funding needs in mind, how does one maximize our earning power?
Budgeting is the key to a stable financial future. Too many people live paycheck to paycheck, paying for expenses as they arise but not setting aside any funds for emergency expenses or retirement purposes. Establishing a monthly budget is a great way to stretch one’s earned income, maximizing earning potential. With the help of a financial planner, it is easier than ever before to create a budget that works for your unique lifestyle and financial circumstances. Monthly budgets typically include spending areas like:
• Household expenses
• Vehicle Expenses (maintenance, insurance, fuel)
• Retirement savings
• Leisure Activity Expenses
• Food Expenses
• Clothing Expenses
One should strive to set aside a portion of income for retirement purposes. Financial planning experts recommend putting 10% to 15% of annual income in retirement savings plans such as IRAs, employer-sponsored 401(k) or 403(b) plans, or traditional stock/bond/mutual fund/securities investments. The process to put money aside is easier than ever before; most banking institutions provide their customers with a range of automated paycheck deduction options. You could specify a percentage to come out of each paycheck, or make automated withdrawals on a quarterly basis, and those withdrawals would go directly into retirement savings.
Another great way to maximize earning potential is to take the steps necessary to receive work promotions. Taking on new tasks, showing superiors that you’re willing to work hard, and continuing your education to gain valuable skills are all time-honored ways of standing out in the workplace. With hard work and a commitment to achieving success, you can be promoted through the ranks. This obviously brings in a bigger paycheck — with increases that can help you fund your lifestyle and your future alike.
Earning power is a vital aspect of our working lives. With our incomes, we can take care of current expenses while keeping an eye on the future. To learn more about ways to ensure a stable, secure, and successful financial future, speak with a certified financial planner today.