Detaching from the Matrix…Small steps to big rewards
We are in a mess. We got this way because people forgot that the power brokers of the world treat life like a chess game, and we think of life like a daily or hourly experience.
It is time to get real. You've been told to pay attention in school, get a degree. Then get a good corporate job so you can enter the middle class. Well I'm here to tell you that it often doesn't work, and what you need to do to rethink that approach in the 21st century.
In the economics of a career, you are selling your time to a customer who will pay money for it. We all want to get the highest return on our time. Our time is valuable and it represents the only truly finite resource that we humans have in our life. It is hard to put a price on each hour of your life, because each hour is precious. But if you have to sell your time by the hour, let’s look at the actual rates you might get in a corporate career and why it might not be as profitable as you might expect.
The assumption that most people make is that they will enter the workforce and probably have a career for about 40-50 years. If we consider that each working year has 2,000 hours (that is 50 weeks x 40 hours per week), that means at 40 year long career, you are working for 80,000 hours. Yes, that’s right – you are voluntarily giving up 80,000 of your life’s hours to a boss in return for a paycheck and the positive psychological feedback you get from feeling like your time is worth something, making a difference, the value of service, etc.
Most people look at a job like this... The employer offers a job doing something they think they want to do. They offer a salary (usually measured in the total amount of money the employer will "pay" them per year). Maybe it is a $30,000 salary. Or a $50,000 salary. Or a six figure salary. Or a seven figure salary. The amount is the determination of the employer of the "market rate" of your time. If you are just a worker bee in their organization, they have guidelines of how much to pay because they don't want to upset the other worker bees. But if you are looking at management, where your impact will be more important, they will pay more to higher those that can give them the greatest impact. That's how it is all sold. This is the perspective from the employer. If the employee accepts this, then they have immediately accepted that the employer controls the canvas of the business transaction, and that nothing can be changed. That is exactly how the employer wants to see it, because if they control the conversation, they can direct it to where they want it to go.
But this approach is one-sided and doesn't take into consideration the real costs that you have already incurred and will continue to incur in order to be able to provide those hours to the employer. This is what most people forget to calculate. Business people are laser focused on cost controls, but employees often are not. At least not until it is too late. There are many components to the actual costs that an employee will incur to run "the business of you". They include costs you probably have forgotten about, but they define your actual net income. We will look at a few here, but you should create your own spreadsheet to show what your true costs will be BEFORE you sign any employment contract, because the employer will not tell you this. This is where the buck stops on your desk.
Let’s consider what it took to get you to your first job, because in a world of student loan debt, the onramp to employment comes with a debt load these days. Now granted, not everyone goes to college and not everyone ends college with student loan debt. But in 2019 as I write this, the majority of students do, so let’s take an arbitrary $50,000 of student loan debt into the equation. So just to pay back the $50K, you are going to have to deduct $0.62 from every hour’s earnings you make in your career. Of course the banks want that money back ASAP, so it is typically front-loaded meaning that you can’t invest the money you are paying in student loan payments. The result is that if you take that $50K, and were to invest it in compounding interest at 3% over the 40 year career cycle, you would actually have $163,101 which actually represents $2.04 an hour. This actually matters because if you are not earning a large hourly rate in your salary, losing $2.04 an hour to pay back your debt load from your education is quite substantial.
So let’s start with some hypothetical scenarios that are based on average numbers. In a survey from the National Association of Colleges and Employers, they found that for 10 broad degree categories ranging from engineering to communications, 2016 graduates are projected to earn an average salary of $50,556 per year. OK, the numbers are getting a bit easier to work with – let’s say $50K.
First, let’s start to really define the term “earn”. What you earn is what you get given to you – not some mythical payroll number that we brandish around as a lie. If you live in the USA, you pay taxes on your earnings. So on a $50K salary, you will pay on average 18% of that in taxes. That number goes up and down depending on earnings, but for $50K it is about 18%. That represents $9,000 in taxes, meaning you get $41,000 in your pocket. So if we think 2,000 working hours a year, that is just over $20 an hour. Less the cost of your education to get you there, and you are making about $18 an hour.
Now we have to deduct the annual costs of your life to allow you to get and keep a job. There are social expectations with living in the 21st century, and they are further cemented into the psyche of the US citizen in the workplace. You are expected to have decent hygiene, clothing, feed yourself, have reliable transport, have reliable communications, etc. And additionally most jobs that pay $50K per year are in urban cities, meaning that your cost of living is based on where the job is. If you lived in a remote country town in Arizona, you might be able to have acres of land for $20K, and build a modest house for $100K, and your costs are relatively low. But if you lived in Los Angeles, and you deal with the urban traffic jungle, you not only need a very good and reliable car but you also have to live near where you work. Spending 2+ hours each way in traffic isn’t a life, and further erodes the hourly rate.
So you are probably going to be paying $2,000 a month in rent or mortgage for an urban house. In highly populated cities like Los Angeles, that number is probably double. Let’s say $3,000 to give us a fair average price. In fact a quick search on RentCafe shows that the average apartment in Los Angeles is $2,371 and an average home is $570,000. Compare that with the national average of $218,000 and you can see the difference is massive.
A 30 year mortgage for a $500,000 amount based on 5% interest is about $3,060 per month in payment. A 30 year mortgage for a $218,000 amount based on 5% interest is about $1,170. Massive difference. That represents an hourly rate cost differential of about $11,30 per hour, which over a 12 month period represents a cost to you of *2000= $22,771. Now salaries in bigger cities are higher, so I’m going to look at reasonable differentials in wages between cities for comparison…
According to https://www.bestplaces.net/cost-of-living/phoenix-az/los-angeles-ca/40000 a $40,000 salary in Phoenix has the equivalent of $68,000 in Los Angeles. That is a 58% increase. Nice. But the costs of living are substantially higher, so that pretty much wipes out the numbers. The point here is that if you can work remotely with a Los Angeles employer, but live in the country somewhere, you bank the difference.
And if you don’t have to pay $500 a month for a car to sit in traffic all day, that means lower costs. According to CNBC https://www.cnbc.com/2018/02/22/study-states-with-the-longest-and-shortest-commutes.html the average commute one way to work in the USA is 26 minutes. That means 1 hour a day is spent in traffic getting to and from work on average. That is 5 hours a week, 20 hours a month or 240 hours a year of your life or 9,600 hours of your working life. Sitting in traffic because of the obligation to have a job. That represents another deduction of your hourly rate down another $1.70 per hour based on the fact you don’t get paid to sit in traffic, and you have to deduct your time cost from your after tax earnings to make this work.
So let's look at this as a table. Your situation may be different, but here's a couple of scenarios that illustrate my point:
|Job A||Job B||Job C|
|Education Sunk Cost/yr*||-6500||-6500||-6500|
|Lost investment income on Edu**||-4212||-4212||-4212|
|Food costs per year||-2400||-2400||-2400|
|On costs for car, fuel, clothing, suits***||-6000||-6000||-6000|
|Actual money you keep per year||21,888||45,763||60,888|
|% of salary||43%||61%||61%|
|Actual hourly rate||10.94||22.88||30.44|
* Assuming $100K student debt cost, paid over 15 years
** Assuming a 40 year investment of $100K, at 2.5% interest compounding
*** Assuming 50% use of vehicle for work, fuel costs based on 2019 averages
The above table does not also factor the cost of living in the geographic region you have to be, based on proxmity to work. Considering that the salary range here is based on jobs from a four (4) year college degree, they don't represent the entire top/bottom end, but they are not salaries based on graduate degrees, either. According to the Dept of Health & Human Services, the income poverty rate in the USA for a single person is $12,490. Meaning that any individual with a $50K salary, is only about $10K higher in earnings than someone considered to be in poverty in the USA. If you are the breadwinner for mulitple people in a family, the numbers are far more challenging. But consider that your actual money you keep per year has to pay for all the costs of living, from accommodation to food to insurance to Internet/cable bill, etc. and you can see why CNBC states that 78% of all Americans are living from pay check to pay check.
Holy cow, it is getting SUPER EXPENSIVE to have a job. We’re not also taking into the account that you don’t have anywhere near the tax deductions that a self-employed or small business owner would have, and you are stuck. It is not surprising that the average American family carries more than $15,000 in credit card debt, and that 46% of Americans couldn’t come up with $400 to cover an emergency (https://www.thesimpledollar.com/the-upside-down-reason-most-americans-are-broke/)
And here’s the worst part of this. Your income level is relatively fixed. Sure, you could find a better paying job but with each move there is a cost of transport, upheaval, etc. that has to be gathered back before you are in the black again. We are not taking into account those costs because they are hard to quantify.
I think it is fair to say that the $50,000 salary ends up with nearly nothing left after all the costs are incurred to have that job and a “normal” life is lived. Just to get you to the point where you have actual money to take home, you are probably down to somewhere around $10 an hour left after the costs of running the business of you is paid.
So when I watch TV and hear our politicians all talking up that they are creating more jobs, I cringe. Because they are creating more traps for people. Traps of enslavement, rather than dealing with personal economics like a business person would. Also when I hear someone bragging about the new job they got and the salary, etc. I know they haven't run these numbers for their own situation.
THE TRUTH IS THAT WHAT YOU REALLY MAKE AS INCOME IS WHAT YOU KEEP - NOT THE SALARY AMOUNT.
The first reality of business is that the buck stops with you. That creates a very pragmatic and realistic attitude to money. Making mistakes by artificially inflating things can be a disaster when you have to quantify everything exactly. Hence a business is not considered great just because it has a lot of revenue. It is the profit it makes, that is the key.
Profit = Revenue LESS costs
A highly profitable business is the goal. This means adjusting things you have control over (costs) downwards and things you have less control over (sales) upwards. You also learn very quickly that if it costs you a lot to get a sale, maybe it isn’t the sale you want to pursue. Business people understand the value of a customer and when a customer becomes too much of a burden or cost, they learn how to cut loose the customer. Being flexible, constant measurement of the enterprise and being willing to act quickly is the reason some business owners are multi-millionaires or billionaires. This is a high stakes game, but the discipline to see things evolving regular is the difference of winning or losing – survival or death.
The same mentality is not shared as much with employed people. They have one customer – their boss. They don’t get the advantage of supply/demand. They can’t adjust their pricing based on what the market will bear, rather they get what they get. Sure, there are some advantages like not having to constantly market yourself all the time, but in a world of high competition and risks of layoffs to automation and robotics, the employed person probably has to constantly market themselves anyway or lose their job. They don’t get to mitigate risks as well as a business owner, by having many customers, because they have just one. Lose that customer and you lose it all.
Yet they don’t have to pay for health insurance. OK, but is that really worth that much? Sure the $1,000 a month premiums are not nice to pay for, but the deductibles are still pretty high. And if they get sick and can’t work, there are going to be only a small number of days that they will be paid. The risks of this mean carrying a decent emergency savings plan, which the small business owner is doing anyway or having access to capital funding anyway.
So when I look at the difference in mindset between employed and business owner, it is clear that there is only one place that I would want to be. Sure, I get to wear my mistakes. But isn’t that the case with a job as well? Gone are the days when you worked for the same employer for 40 years. These days having the same career over that time is unlikely. People are more interested in the “gig economy” or freelancing than working. And with the high costs of urban living, corporate expectations, lack of risk mitigation, etc. it is not surprising to me to see an uptick in this.
This is where the mindset is very different. See, a small business owner is doing what they love because they chose to do it. Sure, they might hate their business if they are falling on hard times with paying bills, etc. But it is THEIR business. If they made a mistake, they wear it. But if they didn’t, they get all the benefits. If they run it properly, then it should run itself in their absence. They can sell it when they are done with it. You can’t sell a job.
It comes down to whether you are doing what you love or not. If you are, then why would you ever want to stop? Maybe you don’t want to stop, but your body starts to get old and you choose not to. OK, but then maybe the answer is just scale things back a bit. You can’t scale back a job. You go from 100% invested in the job to 0% invested. In a business, you have more flexibility and more options.
When I watch those that are employed get onboard with the FIRE (Financial Independence Retire Early) crowd, I realize that they are rebelling from this horrible thing called a Job or a career. And who wouldn’t. I mean you saw my numbers above and that is not enticing at all. The income made is pathetically small after you deduct the costs of supporting it. Your time is taken from you, and your choices are now the choices of your boss – not yours. Want to spend a month traveling around Spain? Good luck having a job when you get back.
So they rebel. They save up huge amounts of money and give it to a 3rd party (ie. Index fund, investments, etc.) and they hope that the 3rd party fund will pay them regularly like their old job did. They are trying to mimic the job, without having to do the work. Nice try, but it probably won’t work. Markets go up and markets go down. Life happens. You decide you want to do something exciting with your life and you need money – you don’t have it, so you have to dig into your savings. The alternative is to scale back your expectations to a point where you live a minimalistic life on uber frugality. Whereas that works great for Buddhist monks, it doesn’t work so good in the western world. Just ask any 70 year old retiree how their days look, and they are not so great. Money provides you with options, choices and experiences. Try learning to become a pilot without any money. Ain’t gonna happen.
If you decide at the age of 30 that you want to live like you were 70, then I’m afraid it may not end as well for you. If you take the word “retire” out of the equation though, then that’s a different story. You have a life ahead of you to take risks, get experiences, live it to the max. That takes money, but you could also pivot and change your world from being employed to being self-employed. Start a business, take up freelancing, etc. You need to do something. Your psychology and ego requires some stimulation in that you need to feel wanted. You don’t want to stop, get lethargic and depressed. Yet this is a common result of forced retirement.
So you are faced with a choice. If society has been telling you for years that you need to get a degree, have a great education and get a great job, consider that to be pure propaganda. The costs associated with having that job results in most of society not actually making any money, giving up their valuable time and choices and living a life of being a slave to employment. The thing is that the corporation needs warm bodies to perform tasks in order to make profits that make shareholders richer. Given the choice, they would replace a warm human body with a robot or computer program. So the whole concept of longevity in career is flawed due to the advent of technology.
But this is a business. What so many people forget is that a business deal involves two or more parties. The party of YOU and the party of EMPLOYER. You have the right to accept or reject any offer of employment. And the employer has the right to cease to offer said employment. It is a two way street. Once you start to realize this, then you no longer are a victim to a one side deal, as most employed Americans are. It takes some courage and recognition that you don't give up your freedom to any 3rd party and you protect it carefully with the best strategic decisions you can make for the benefit of you and your family.
One path might be to reject emplolyment entirely and go into being self employed as an entrepeneur. f you choose to go out into the world as an entrepreneur, you will learn the art of selling, asking for the order, and the art of keeping expenses low. You know that your goal is to focus on the profit, not the revenue. And your goal is also to build up something of value that you can sell at the end, and yet something that doesn’t drag you down and lock you into it. Something that gives you flexibility to spend only the time you want in it. There’s a lot of “ifs” in that, but the reality is that you are in control of every decision out there that drives you towards that success. It is exciting, but it can be scary. You have to do what fits best with your personalty and culture.
I have witnessed the institutionalization of American citizens for a long time. I come from a "bottom up" business paradigm, where I'm 100% self-made and my decisions to invest my time into certain ventures came with it the risk of that venture not succeeding. But I knew that to live a life where I was always looking in the rear view mirror, regretting NOT doing things that came along that would have made me happy, was not a life I wanted. That deferring my security to a 3rd party looks attractive on the surface but giving up responsibility is matched with giving up power. And that the power of control that I needed for my family & I was more important to me. To this day, that approach has served me well. I work on my terms, when I want to. I choose who to work with - whether that is employees, contractors, etc. and also I choose whether to serve a customer or not. If a customer treats me like an employee to them, then it is a bad business deal and I walk away from it. It is that simple. But if they treat me as a peer and provide that level of respect, then I will happily work to serve and help them. Win-Win relationships are the only relationships that I will accept.
The same choices should be yours to make regarding your working future. If you choose to have ONE customer as your source of income (ie. a job) then you trust that the relationship that you enter into will be a good WIN-WIN relationship for years to come. You are giving up the power of the market to one customer. That customer will undergo management changes, your boss will leave, a new boss will take over. The company could be sold or merged with another. They could move geographically and require that you move with them. They might lay you off if they choose to go in a different business direction as the climate changes. There are no guarantees here. You are fooling yourself to think that there are. That illusion is the trap that you will find yourself in, and you gave up the power to adjust to the changing business circumstances when you took the job, so go into that decision with eyes wide open. You will not have as much power once you sign the employment contract as you have before you sign it. There are traps out there and in our current economy, those traps are often hidden and deep.
Anyone that has a horrible job they hate would spend tens of thousands of dollars to buy their freedom. If not more. Deduct that against their already depleted income, and you can see that most of them do not have the choices to do that anyway. Go forth and be great, but don’t repeat the same mistakes as the herd and think that following a corporate job is the answer to a successful life. It isn’t.