Increasing Your Income

"Give me six hours to chop down a tree and I will spend the first four sharpening the axe."

- Abraham Lincoln

In order to retire, you must accumulate wealth to draw upon when you are not working.

The most obvious way to accumulate wealth is to save money by spending less money than you earn. This is not the only way to accumulate wealth (and perhaps not even the best way), but it's the most straightforward option and it's the one I've chosen. Given that as a starting point, it's clear why there has to be a focus on income.

The single biggest thing you can do to increase your chances of higher income and wealth accumulation is to acquire more education. Income is strongly correlated with level of education. Perhaps less well known is the fact that employment rates are also strongly correlated with level of education. More education means a higher chance that you will be employed and that you will make more money while you are employed. This is illustrated in dramatic fashion by the following table:

Education Level	2005 Yearly Earnings	2005 Unemployment Rate
Some high-school, no diploma	$21,268	7.6%
High-school graduate	$30,316	4.7%
Some college, no degree	$33,956	4.2%
Associate degree	$36,348	3.3%
Bachelor's degree	$48,724	2.6%
Master's degree	$58,708	2.1%
Professional degree	$71,240	1.1%
Doctoral degree	$73,892	1.6%

Source: U.S. Bureau of Labor Statistics

All of these facts are consistent with my personal experience. Back in 1990, I had a Bachelor's degree and I was making about 24K per year. I quit my job and went back to school. 18 months later I had a Master's degree and landed a new job making 38K per year.

Of course there was hard work involved. But frankly, it was probably no harder than 18 months of employment and a lot more enjoyable. Amazingly enough, my entire tuition bill was less than $3,000! That is an unbelievable return on investment! Even when you factor in the opportunity cost of 36K (24K/year x 1.5 years), the payback was fairly quick.

I subsequently went to school for 5 years at night while I worked during the day. I eventually dropped out of a PhD program after completing all my coursework and comprehensive exams - in other words, another All But Dissertation dropout. Still, the mere fact that I was in a PhD program opened up other doors and my salary increased substantially. I really don't want to discuss my salary in any remotely recent year, but there is no doubt that the extra education increased my income significantly.

Notice that a small increase in your income can have a dramatic increase in your savings because of the leverage involved. For example, suppose you are making 50K per year and your expenses are 45K per year. Your savings are 5K per year. Now if your income increases 10% to 55K and your expenses stay the same, your savings have now doubled to 10K per year - a 100% increase in your savings rate. This is intuitive and obvious to most people, but I think we generally still fail to grasp the big picture of what that means.

So let me put it another way. According to a U.S. Census Bureau report, a person with a high school degree only is on average expected to earn about $1.23 million over the course of an entire working career, while a person with a Bachelor's degree is on average expected to earn about $2.14 million. Now what if $1.23 million in living expenses are necessary throughout life? Think about it! The high school graduate is able to save zero. The college graduate is able to save $910,000! And if the college graduate's savings are invested each year, they will grow to several million dollars. Unfortunately, regardless of the potential investment returns, if the high school graduate was unable to save any money, the end result will still be zero.

In addition to the highly probable financial gains, there are also a lot of intangible benefits to education, including social networking, a sense of accomplishment, and exposure to new people and new ideas. That is why you won't find a lot of people who say, "I wish I had never gone to college and completed my degree."

Caution is always in order when applying averages to your own life. Nothing is guaranteed. It's obviously possible to make a lot of money with little or no education, and it's possible for a PhD to be out of work. For most people, however, more education will lift income. Often when people start crunching their retirement numbers, they find that things are not working out fast enough, and they begin searching for investments with higher and higher rates of return. If you find yourself doing that, remember to consider what will probably be your best investment: more education.