Let's not forget about Taxes!
Yet, it seems common for folks to ignore the 2 certainties. Well, except the ultra-rich corporations and individuals who do whatever they can to avoid taxes.
But shouldn't we all look at everything on an after-tax basis?
Despite bankers and investors looking at businesses based on pre-tax metrics like Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA), the money the company gets to retain and give back to shareholders (i.e. dividends and buybacks) or grow externally (i.e. acquisitions) uses after-tax money. Of course, companies growing organically will get to use pre-tax profits to fund their internal growth so may not even have any taxable corporate income (i.e. Amazon). Sooner or later though, they will need to utilize other options to grow or generate value for shareholders and that after-tax profit will be important. Why else would the big tech companies like Google and Apple be setting up offices in tax havens like Ireland or Luxembourg?
So, when looking at businesses taxes can't be ignored. Yet most employees seem so focused on the gross amount of their salaries instead of the after-tax amount. The average Joes at the bar even like to use their salary as an alternative in their dick-measuring contest. But people are forgetting that we only keep the after-tax profits. At least companies get to pay for their operations with pre-tax profits. Employed individuals have to pay for everything after-tax, sure we get deductions here and there but those aren't material enough, at least in Canada.
It's common for folks to use the gross income number as a measuring yard stick to associate their value and net worth to but when you live in a tax heavy country like Canada, it really distorts the reality of your situation.
So, keep in mind that everything you do will be taxed here.
What happens when time is part of the equation?
I was thinking, like many things in life, there is probably a point of diminishing returns for the amount of money you earn and the time you spend earning it. Look at the graph below. The X-axis would be your personal resources (i.e. time, effort, sweat etc..) and the Y-axis will be what you gain (i.e. financial, quality of life etc..). After this point of diminishing return, each extra input you put in does not provide you with an exponentially better output. Essentially a lower return on investment (ROI). So, then the question I wanted to answer was, at what point is the incremental dollar you add on your salary not worth it? How do you determine your point of diminishing return?
Given the "after-tax" income of everyone of different income levels, at what dollar per hour bucket is it just NOT worth it? This also puts into consideration that the time spent to earn X income is time lost in the week to do XYZ other things (things that make up the foundation of the quality of your life).
Looking at the chart above it is apparent that there is a sweet spot with each $/hr mark for each annual income level. But alas, that sweet spot is oh so relative to the individual’s values and goals. The highlights will become clearer as your read on.
Corresponding to the number of hours worked in a week would be the amount of time you have for other activities in the week (Residual Time). These activities combined with your work are what would define your weekly life. The point of the table above is to show you in relative hourly terms what each income level can achieve per the time invested. Let's explore a few cases I've personally come across.
Let's look at the $/hr rate for the above roles. $59.66/hour. Let's look at a few other roles I'm familiar with from my personal network/experience sphere.
For each role to provide the similar level of $/hr rate given the typical weekly time investment the occupation requires of you we can comparably see how much your "gross" annual income would have to be. Up to this point we are just looking at the financial element. Because with a higher gross annual income you'd imagine the total absolute bi-weekly paycheque is higher. Definitely can't ignore that. The consultant or banker will have effectively 2-4x more in absolute income than the entrepreneur.
Let's add another variable to the equation = Intangibles of life
Measuring intangibles is tough business. Believe me. I'm an accountant. So, let's instead look at various elements we should consider in our independent evaluations of the intangibles.
First, I want to look at Residual Time
Back to the table
The Entrepreneur has the highest Residual Time at 87hrs a week. Makes sense, given he works 25 hours a week on his venture. Same goes for the Engineer. So, an obvious trade has been made for other roles. The Banker and the Consultant may receive 2-4x more in absolute pay, but we evidently see that they will have much fewer residual time. The Entrepreneur may have 2.5x more residual time but the Banker earns 4x more... so 2.5 vs 4, the 4 is better because it's higher right? It could and could not be. A common fallacy is defaulting to comparing everything as apples to apples.
We should try to understand the reality of the residual time block. What that time block represents is the amount of time that is within your own control. For the Entrepreneur, technically all time is within his control but if he wants to run a business and continuously keep it afloat there will be time dedicated to customers and suppliers that won't necessary be in his control (though he'd have more than an employee within those 25 weekly hours). The rest of the roles are employees. As employees they are getting paid to build someone else's dream into a reality, so they more or less don't have much control over their time, only up to the point their employer grants them. So, the time outside of the employment work would essentially be the ones in your control (we will ignore the "on call" moments when we have to run out of our Saturday brunch because apparently building an excel model on Saturday is a matter of life and death).
In that residual time block you dedicate everything else that builds out your "life". Whether it's travel, exploring the city you've recently moved to, training for your athletic or artistic pursuit, building and strengthening relationships with family and friends and everything else that you'd deem meaningful to your life.
The Entrepreneur is “time” rich. So, he can dedicate 87hrs a week to all that is dear to his life. If he actually loves his business or just creating new businesses. He could dedicate more of the 87 hours to his work. That is a "choice" he can make to run his life the way it excites and motivates him most. He honestly could give up a little more of that time to scale up his business if he wanted to and could. But it would only make sense for him to increase 5 hrs of workload to 30hrs a week if he was able to exceed an income level of 140K. At that point he is not discounting his hourly rate. But if that 5hrs and 40K additional income came with the stress of a big client who kept him emotionally stressed for 5 more hours later on... then I doubt it’s worth it. Because if you are stressed, it impacts your hormones, which will impact your body physically. Not to mention the stress will harm you mentally to limit your enjoyment of other activities you had planned for your 82 hrs a week of personal growth and this can also adversely impact the relationships of the people around you. But hey, that just me. Those things matter to me.
The Banker has 32hrs. That may be enough for him and that is where the intangibility comes into play. The major difference though, regardless of how much residual time is enough for each person, is how much of the residual time is fully within the person's realm of control. It is whether the individual has the choice to dedicate more of their limited time on Earth to reinvest into their life's work or is it forced upon them. You may be someone who is family oriented and want to actually spend 87hrs being a full-time parent to a new child while your business is a side gig. Because let's face it, there is no point knowing how to be a great parent after you've missed on the growth of your child. Your child will only turn 2 once, your parents will only be 60 once, your best friend may only get married... 3x... can't miss all 3. The point is that with such wealth of time you can choose to allocate it the way you choose. We won't dig into whether you really are dedicating your working hours to something that actually is exciting, motivating and meaningful to you. That's a whole different avenue to explore. The focus is. How much of your life do you want to actually control?
What other intangible could there be outside control over residual time? Well, there is the environment that makes up the time that is out of your control.
To put it simply, the hygiene factor that makes up your work environment (including your colleagues, your superiors, customers, suppliers, location etc...).
Location is a huge thing. A 1hr 1-way commute is a killer. You include that for 5 days and that is an immediate 10-hour deduction to your residual time. This is a really big killer for Consultants where travel to client sites can be the opposite of the glamour portrayed in media. What about the need to even be at an office? The Software Engineer has the ability to be 100% remote so she has the choice of being in a coffee shop in the city (the individual I’ve referenced in this example does). The Entrepreneur can work out of his own home office because that's how he has structured his company. The Controller and Banker both have to be at the office.
What about the autonomy of work? The Engineer and Entrepreneur have the ability to make their own schedule and have autonomy over when to start their task, how long they want to do it for and when to finish it. The Banker and Consultant have facetime requirements, so they have to be in at a certain time, even if they don't have work to do then. Many times they can't leave before their boss leaves.. so there is more dead time there as a captive (I’ve once been on a team that didn’t eat dinner until 10pm because the manager chose to push eating till then, I of course ate at 7pm).
What about the stress from uncertainty? The Entrepreneur faces all the risk of keeping his business alive and with it comes the stress from being the boss. Whereas the Controller is quite certain he will be doing the same thing today and in the next year... that is until his company hires the Consultant to cut fat from the company... and the fat is the cost center (i.e. controllers and accountants in corporations). There is also the certainty of knowing a paycheque will come at "x" amount for the employees but there is uncertainty for a business owner (depending on the form of business model). Though employees are faced with the uncertainty of the personalities and emotions of their superiors who can ruin their day or week at their own choosing.
I hope you are getting the picture here. You ain't going to get an answer telling you which career has the best environment. Though I believe being your own boss will give you the most amount of control in terms of the choices you can make compared to the employee who has no choice if he wants to keep his job.
So far, we've looked at Control over Residual Time and the Environment of Time Out of Control. Well we also have to consider the Journey for the role.
I mean, it's not like you get to graduate from school and the choices will be Entrepreneur $100K per year for 25hrs go to booth A and Consultant $300K per year for 60hrs go to booth C. Each and every one of those roles has a journey associated with it. Some may require more effort than others, some may be achieved in faster time than others. The only thing I can certainly say is that all those journeys will seem linear to the one looking in but once on the journey-path you'll realize it is anything but linear.
However, it is too difficult to try and map out all the possible routes and paths a person can take to reach each of the 4 roles I've been covering as samples. So. I'm going to allocate a range of years I believe is required to reach each spot based on the people I've met, spoken to and observed.
The above ranges are not guarantees but potential benchmarks of what has already been done. So, if one person was able to do it, no reason why there can't be two. It is a matter of factoring in what and how much you are willing to invest to achieve your end game. I'm just hoping to present to you a perspective that nothing will be a walk in the park and each of the roles we look at required hard work in various forms and fashions to get there.
The intangibles to consider come in various forms. But it's associated with time. Even the financial element of money is associated with time. Because money is essentially the currency we use to buy time. Why do I pay hundreds of dollars a month for a powerlifting coach? Because I don't want to go to 4 years of university to learn Kinesiology, then spend the time to learn coaching, then the time to constantly monitor my training and think about creating a new program for my next block of training. That is what I'm paying for. I'm paying for his time he dedicated to becoming a coach and the time I save by not having to do any of that. So that is why comparing absolute financial gain to gain in time as apples to apples is not advised. Because with time, you could essentially compound its value to make it more valuable in the future than it is now. The value of your time will constantly shift and change. Whereas absolute financial gain will always be that absolute value. Even investments compound thanks to time and it's the proper use of such time that makes the difference.
That is the difference if you try to look at what you are earning as the value of your time and how you want to be the master of it. It can prompt you to maybe stay in the current job you don't mind, but also don't love but the work arrangements are perfect for how you want to divide up your time to enjoy other parts of your life. It can prompt you to not take a promotion because the additional income is not worth the extra time and stress you have to spend at the office. For my perspective on actually thinking about the usage of time you can read my article on retirement.
The value of intangibles was evident for me from experience. It would be ideal for me to have had this thought earlier on. Hindsight is 20/20 but given different butterfly effects, I really don't know if even knowing this in my past would've helped. Doing and experiencing seems to be the best avenue for learning.
Realizing the value of my intangibles:
I experienced "loss of control of my time” early in my career as an auditor. I still loved powerlifting then as I still do now. But what became evident was if I was in a job that worked me 80-100 hrs a week, I would have between 68-88hrs a week left. Assuming I got 6 hours of sleep a day, my residual weekly time would be about 26 - 46hrs a week. Hmm doesn't seem that bad right? Not good but not thattt bad.
Each strength training session is about 2-3 hours for me so if I did it 4x a week it's a maximum of 12 hours (12 blissfully joyous hours of lifting heavy metal things off the ground). Manageable. Still got 14-34hrs of the week to salvage afterwards.
Ah, but do you really get work spread out evenly throughout the week? Nope.
Do you also get to decide when to work and when not to? Nope.
Let's be honest, it's front loaded through the weekday then you have about at 10hr spill over into the Saturday most times. So, let's look at the 5-day work week of 120 hours. Assuming I sleep 6hrs a day still, now I have 90hrs left in the work week. I work 80hrs, then I have about 10hrs of freedom. Realistically, I can maybe make that into possibly 1-2 training sessions. But on the weeks, I go hit the 100hr mark? Damn, now I have a 10-hour spillover into the Saturday. I still get 6hrs of sleep there and now you have 8hrs left in the Saturday and 16hrs on the Sunday (because sleep is non-negotiable for health you sleep 8hrs on Sunday).
[Quick Math: 5 days x 24hrs = 120 hrs in the week day, 120hrs – (6hrs of sleep x 5 days) = 90hrs of awake time]
Hmm so could I mash 4 training sessions into 1 day for a long 12hr day at the gym? I could. It would be stupid, and the body would not get anywhere close to the strength development as training consistently daily. But I could.
This is a micro-level construct of the week.
But this was a serious predicament I had faced. What I decided to do was sleep about 2-4 hours in the weekday instead so that I could train 3-4 times a week. I must emphasize that choosing to sleep less hours than your body requires, whether it is 7 or 10hrs, is nothing to wear like a badge of honour but a badge of stupidity. There is nothing more short-sighted than neglecting your health. Sleep makes up one of the foundational elements of your health.
You will also notice there was no mention of friends in this micro week. Yeah... so you have got to squeeze in your significant other and friends here somewhere too.. because humans are social creatures and even introverts want the company of others too. What this experience ultimately taught me was how much I valued my training. How my entire workday would be negatively impacted, and the quality of my work would be lower knowing I was neglecting my health. Because of this experience, I knew I would not be looking at jobs that required such hours (i.e. Investment Banking). However, this was a conscious choice I made after assessing the possible downsides (i.e. missing out on higher annual salaries, lucrative exit opportunities to private equity) for guaranteed upside (i.e. More time to train, focused on being healthier so I live till 100, more time to see friends and family) in forgoing certain career paths. Because whatever the possible downsides are.. most of the time you can find ways to make up for that because there honestly isn't one defined path, just paths that are a) over-crowded and filled with shit from other travelers or b) hidden behind bushes and scrubs that they don't even look like paths to anyone but you.
But isn't that short-sighted Dan? Shouldn't you look at life as a marathon? Oh yeah definitely. Life is a long journey, well at least we plan it to be at least. But oddly enough the marathon of life is made up of constant short sprints and that's where what you do in days add up to weeks, to months, and then to years. Given everyone's preference on what they value in life there are things one must realize is limited by the availability of time.
For example, prioritizing on your health. Health isn't something you get to "make up" for and get to be at the same place as someone whose focused on keeping it a priority for decades. If I continued training to be a world-class athlete for the next 20 years, there is no way for someone who neglected their health in the name of building up a cash stockpile will able to match my strength level as a powerlifter in 5 years at 40. It's not impossible but if that guy who started had the same genetics as I did (more so the lack of athletic genes)... then no. No way. Not to mention I would've had to live knowing I wasn't training to be a top athlete for 20 years, to me that sounds really shitty. Because neglecting your health for 20 years doesn't put you at average. Most likely below average and requiring time to even get to the average level required to be a properly functioning human (which I think the bar has been set lower and lower every year).
I had to think about the options. The best way to do this for me was through lots of conversations and observation of the potential futures. It was choosing between Life A: slugging away at a time-consuming and un-motivating career that guaranteed safe and high financial gains or Life B: knowingly forego the certain path by focusing on things that mattered to me and building a different road that tailored to me
Life A may have had more absolute financial wealth than Life B... Or will it? Life A may be much more predictable than Life B. Get the job, forecast out annual salary raises and bonus amounts per the industry average, and you can somewhat see the financial wealth predictably 5-10 years out. Just look at the boss for benchmarking.
Life B? Unless it involved similar and predictable employment it's hard to determine. Forecasting is a tough game. It's best to start from base rates. Base rates are quite predictably available for established white collar jobs at large corporations (i.e. accounting, consulting, finance etc..). But the base rates for someone who risks the uncertain to build his own career enterprise (I think its called entrepreneurship)? That is a really wide band. I could be hugely successful (I personally hope so at least) or just blow up like many have done (a possible downside).
What I can conclude though is that Life A will be less healthy and have spent less social capital with friends and family. This is a certainty given the absence of time to have invested. I want to even go further in saying I probably would not make the time to develop myself further through reading or meditating (given the absence of time and neglect of other priorities in life). These are the absolute certainties. The uncertainty is the financial wealth. Life A mayyyyy have more absolute wealth than Life B, contingent on Dan in Life B failing. Though wealth isn't just financial now.. I would argue a huge portion of wealth is tied to how much time you control. But we've been able to narrow certainties because Life A has more restrictions. More restrictions make it predictable. More predictable means we ASSUME it is more secure. Secure because humans inherently take comfort in the knowable and are biased to seek out the safety of what is predictable and knowable.
So, what happened?
Since then I've pursued various endeavours. Each step calculated to build towards an end game I envision, though I must say it continues to get updated and refined as I learn more. But that is the journey. It's been a fulfilling journey that I would not have experienced had I not made choices that prioritized things that I truly value. Unfortunately, it's never just steaks and fried chickens (that's my happy place.. I'm sure you have your own). There are constant obstacles in each journey and mine has been no different. But if the protagonist doesn't find obstacles the book doesn't become a bestseller so it's good I've had lots of obstacles. I'll probably need more to become a bestseller though, so the journey continues.
What I'd like to end off on is to ask you to think about how you'd value our time. How you would choose to measure your intangibles. Then, act. I'm an accountant so I still try to act in a risk-averse way, so I'd recommend that to you as well. Though everyone has their own version of what "risk" is, so you'd better define that too.
Looking at the table above again, ask yourself.
- What do you value and want to prioritize in your life?
- What is the price for your time?
- What are you choosing to do and choosing to forego?
- Where does that put your point of diminishing return?
There is no correct decision. I think all choices are valid. If the choice has been made after understanding all relevant facts and it is made deliberately.
Action Step: I’m sure when you read through this article someone popped up in your mind. Could be a friend, a family member, a colleague or acquaintance. Share this with that one person. Then, discuss how each of you value your intangibles. One is a fool but two is a partnership. There is value in discussion.