What No One Tells You About Building Wealth

“It’s not how much you make, it’s how much you keep.”

I mentioned in my first post that my goal right out of college was to make six-figures by 30. I’m not there yet, but as I grew closer, not much felt different. What would feel really different, I realized, is if I didn’t have $48K in debt weighing me down. So, at 28, I switched goals: I decided I wanted to be debt-free by 30.

The pivot was due to two reasons. The first reason was the effect my debt had on me. My lingering balance loomed over everything I did. Or didn’t do: like taking trips with friends or properly prepping for my publication laying-off the entire editorial staff. The second reason for my pivot wouldn’t become clear to me until mid-way through my debt journey: I had so many loans and other bills, that no dollar I earned was ever truly mine. I’d made all this money in my 20s, over half-a-decades work. How much of it did I still have?

This isn’t something I knew when I first started to payback loans but became clear to me as I read and learned more about financial literacy. Like many, society taught me to focus on earning a lot of money. “All my problems would be solved if I just made more,” I’d tell myself. What I’ve learned since is that this is only partially true. Unfortunately, anyone, at any income level, can be struggling. Like Kanye asking Mark Zuckerberg for a loan struggling. Just as important as how much you make is how much you keep.

Here’s what I mean (using extremely oversimplified terms): say Person A earns $100K but owes around $50K in debt, while Person B makes $50K but has no debt. Who’s wealthier?

While Person A may have more buying power, the two are equally wealthy.

Income and debt are just two pieces of the financial puzzle though. Let’s add in expenses and savings rate. Example: If Person A makes $100K a year and spends $100K a year while Person B makes $50K a year and spends $40K/saves $10K, who’s wealthier?

When it comes to who you should be, only you can answer that. A lot of us are, ideologically, somewhere in between the two. On paper, though, the math says Person A is more financially fragile than Person B.

Here’s why: Person A can afford to buy more than Person B, but at the end of the year, P.A. doesn’t keep any of it — their money isn’t theirs. If P.A. is forced out of their trendy millennial publication job for any reason (laid-off, health reasons, probably laid-off), they’re suddenly on the hook for a lifestyle that costs $8,333 per month. (I’m assuming these fictional people don’t have to pay taxes. Just keeping the math simple.)

How about Person B?

P.B.’s life only costs $40K per year, and they keep an extra $10K for themselves each year. When their trendy media site lays them off, they can go three months (a whole season!) without working and without feeling squeezed. Person B keeps the $10K in an account that earns them 2% interest. They get an extra $200 each year, at least, just for having money. Person A has loans that carry 6% interest. P.A. loses $2,880 each year, at least, just for owing money.

Setting money aside for savings is a two-steps-forward-one-step-back routine for P.A. All that debt, and the interest causing it to grow, makes meaningfully saving extremely tough. (I can relate to P.A. here. When I could only afford to save $200 out of my paycheck per month, my ~$48K debt at ~6% interest cost me around $8 per day, or $240 per month. That’s no way to save).

Time passes, P.A. and P.B. are now five years older.

Person B has saved $50K. P.B. could comfortably walk away from their job for a year if they wanted. Meanwhile, Person A’s made $500K in five years (ten times P.B.’s salary!) but has saved nothing. They could lose their job and feel squeezed after one month. After 10 years, P.B.’s managed to keep $100K of their earnings. They could go years without working. Meanwhile, also in 10 years, P.A.’s made a million dollars, but kept nothing. They could lose their job and feel squeezed after one month.

For the bulk of my 20s, I was terrible at money, worse than both these fictional people. Not only was I not paying the minimum on my debt, I wasn’t paying anything at all! So who would I rather be now? Person C: $100K/year and no debt. Duh.