Discounted Earnings Potential

Sike.  I’m not taking you through the above.  I’d kill myself shortly after you would (so like now).   As always, I use math only when absolutely needed, and I’ll always prefer the concept over the math when the concept is sufficient.  I mentioned in my post, “Should You Pay off Debt, Or Save for Retirement?” that all you poor sap parents out there should pay off debt aggressively before saving for retirement.  I stated that this is because your discounted earnings potential is largely tapped, much like your reproductive prowess.  Let me dive into this further.

What Discount?

Discounted Earnings is a bit of a confusing term due to the word “discount”.  Us finance folk have never been known for our ability to use words good.  For the purposes of this discussion, “discount” means future earnings after expenses.  “Why don’t you just call it ‘Future Earnings Potential?”” you ask.   Because its future earnings after expenses, not just earnings.  Pay attention, Bueller.

Discounted Earnings and the Future’s Potential

This is an important concept to understand.  We can break it down in two parts.  The first we can call Future Earnings Potential, which I will define as the net value of all your earnings-income, investments, salary raise, etc…  The other is Future Expenses.   You age limits both, and together they equate to the Discounted Earnings Potential.

If you want to retire then there is less time to continue to save and invest, since after retirement you will be dependent on investment income, and Depends.  Due to the rising expenses that come with growing timeworn your expenses will increase[1].   So Future Earnings Potential is on a downward slope, and your Future Expenses are on an upward slope.  That makes the graphical equivalent of a frowny face.

You goal is to take the red arrow in the sarcastic chart above and make it as flat as possible.So now you understand the concept of Discounted Earnings Potential, and why you’re potential in this regard is limited in the same sense Brittany Murphy’s career is.  What to do about it?  As with everything in personal finance, it’s entirely in your control.  You can get out of debt, you can increase your earnings, you can invest successfully, and you can maximize your discounted earnings potential.  I wouldn’t be writing this blog if I thought otherwise[2].  Doing all those things will flip the arrows on the above chart.  That =

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[1] I hope you’re healthy.

[2] Can you imagine if I did though?  I’ll give you the title of every article ever in that blog, “you’re screwed!”

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Mitchell Pauly