Golden Rules of Personal Finance: Your Income is Your Biggest Asset

This golden rule – more a timeless truth than a rule – is especially true in the wealth-building years, but also applies in retirement, even though that life stage is more about enjoying money than building wealth.

Simple maths confirms this is true – if you’re 40, say, then multiply your annual earnings by the number of years you expect to work. It’s a big number. Obviously as we grow older that number-of-years multiplier has less impact, but by the time we’re in our 50s we’re thinking about the income we’ll have in retirement anyway.

And then, the difference between secured income sources like DB pensions, the state pensions, rental income and annuities, and unsecured income drawing down from capital – these are the things that a successful retirement is made of.

When we’re working to build wealth, it is crucial to protect the income we’re earning with our time, by which I mean our salary. This comes in a few different forms, and the ideal is a combination:

Firstly, an emergency fund of some kind – a pot of cash that is accessible if you need it. Easily the most common message I’ve had on email since COVID is how glad people have been to have cash behind them when facing furlough and a 20% income drop and now redundancy.

They’re using words like ‘relieved’ ‘peace’ and ‘thankful’ to describe their emotions in it all. And all from having a few months of expenses in a bank account – not rocket science really.

Next, we’re back to cashflow – you protect your income by being able, at a pinch, to make it last longer by radically cutting expenses. And then we can look to insure our income in case something happens and we can’t work for a long period of time.

Understand what benefits are available from your employer and then consider income protection insurance, taking into account your sick benefits and how long your emergency fund would last. Your income is your biggest asset – DON’T take it for granted. Use these practical steps to protect it and make it last as long as possible.