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Income Compression and Time Expansion

We think we want to be rich. That’s not exactly true. Let me give you an example of what I mean and why becoming a Billionaire might not be what we actually want.

Warren Buffet, the poster child for compounding wealth, is worth roughly $122 billion as of writing. Interestingly though, nearly 94% of that staggering wealth was built or gained after he turned 50 years old. While we all want to be like Mr Buffet, surely most young adults want that wealth earlier. As the great man himself once remarked to Amazon founder Jeff Bezos, “nobody wants to get rich slowly.”

What we actually want when it comes to money

The real desire in life then is not just can I get extremely rich, but WHEN will that happen. Most of us would like for that to happen earlier rather than later. But why? Two of the biggest reasons could be health and time. We may not be able to do at 50 what we can do at 30. For example, my current 29-year old self can roll out of bed and climb a mountain in Scotland, or do a half marathon in Ladakh for kicks, or learn to rock climb. I wonder how these might feel in 20 years though? Having a lot of surplus money now, at a younger age, allows us greater freedom and ability to travel and enjoy things we might not be able to enjoy at an older age.

Additionally, most young adults may have lesser responsibilities and commitments at a younger age. The freedom and opportunity to spend that money doing fun things is thus much larger. At 45/50 years old, most people could have family commitments and other claims on their time. Like my mother used to say, “when we’re young we have lots of time and health and less money, and then when we get older, we have lots of money but less time and health.”

Now to the important part then: How to fix this? While a direct solution is difficult, I believe I have a helpful perspective- The idea of income compression and time expansion. Let me explain-

Income Compression

Most middle-class educated young-adults in India will do reasonably well financially. We will all likely earn enough money to meet our needs and most wants. However, can I pull that income and future cashflow closer to me today on the time spectrum? Can I pull tomorrow’s income a little closer to me today? If I am “fated” to make 5 crores over a lifetime, how much of that can I make this decade instead over the next three decades?

More money v. More money now

The idea of income compression is that if I can pull future money (that I am “destined” or probably going to make) closer to today, then I can either enjoy it and be happier, invest it earlier and become wealthier, or save it and become more secure. In my humble opinion, this is what most of us wish for. Having more money when we are young is very appealing because it gives us a valuable resource- money- at a point in life when we also have two of the other most valuable resources- time and health.

How to compress our income and earn more sooner?

Implementing this perspective of income compression involves being a lifelong learner to grow our skills in our field of work/interest and figuring out a way to deliver value at scale or in a rare niche. Each of us have different circumstances and so this could look very different. For some, this may look like climbing the career ladder within a company, or starting a side hustle that can then be expanded, or developing a skill that is high-value and rare. In all these cases, what is common is self-growth and improvement and delivering value that is hard to find elsewhere. The idea is upskilling to grow and delivering value to attract or pull money towards us now. Investing money is an added step here and can help us develop parallel streams of wealth growth, apart from leveraging just our time.

Time Expansion

Trying to make more money is good. Actually making more money is great. But what if that doesn’t happen or it takes longer than we’d hoped? That’s where the perspective of time expansion comes into play.

Broadening the healthy living window

The first part of this perspective involves activities and habits today that help us hold a high-quality lifestyle for a longer period of time. For example, habits like exercising regularly, strength training, eating whole foods, sleeping well, and avoiding smoking and alcohol, help ensure that this feeling of being in our prime (late 20s/early 30s for most of us) can be carried forward for as many decades as possible. The idea is to feel at 45-50 years old what we feel today as young adults. Feeling fit, capable, pain free, and being able to move well is a blessing we may not appreciate till it disappears.

Time expansion does not mean “getting more time,” but rather expanding or stretching the “window of high-quality lifestyle” as related to health. Can I expand being fit and healthy from age 20-40 to age 50 or 55? Expanding that window an extra 10 or 15 years could be awesome because at that age we may have much more surplus money to play with. Personal finance literature today focuses on one side of the equation- how much money we have and how that is being managed. The other side of that equation however, is lifestyle management- how healthy are we and can we do what we want with our money. Cutting down medical costs and being able to enjoy our money the way we want to is a blessing not found in percentage returns, asset allocation charts, and financial forecasts.

Buying back time

The second piece to time expansion is having freedom of time and lesser obligations or claims one one’s time. While family and relationships are assets to be cherished, one big claim on people’s time is the feeling of being stuck because of poor financial decisions. When we take on too much lifestyle creep, which is upgrading our car, house, watch etc., as fast as our income, we lose the option to take a break or claim our time back. I may be making 50 lakh a year, but if I have a huge EMI and rich tastes, my time does not belong to me and I am required to keep working to meet my lifestyle costs.

While this is highly subjective and contains may caveats, the idea is that we might not feel good being stuck. This is especially true if we have passions in life other than our primary job or if the things we spend money on and/or go into debt for are not things that actually bring us joy. In India especially, silent social norms and expectations influence actions. We may take actions today, that we don’t actually enjoy, because of external pressure and expectations. The point here is that time expansion later in life also requires building a gap between our income/expense, so we can then “own” our time and have fun on our terms. This is where growing the gap between our income and expenses, investing, and creating passive income become key.

Conclusion

The magic formula in personal finance is a combination of the above two- Income compression AND time expansion. (1) Finding ways to pull future cashflow closer to the present, by bending the money-timeline so to speak. (2) Expanding the time window of enjoyment- taking care of our health and relationships, and owning time by avoiding too much lifestyle creep and investing regularly.

Posted in Mental Models

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