In mathematics there is a concept of a relative maximum. A relative maximum is a region in a function where the function decreases in every direction,but it is not the highest peak. For example, if you were on top of a mountain in North Carolina, you might think that you were on the highest place on Earth since the land as far as you could see all around you sloped downward. There are peaks in the Rockies, however, that make the highest peaks in the Appalachians seem like hills. Then there are peaks in the Himalayas that make the Rockies seem like hills.
People tend to also find relative peaks financially. There are many people who are on unemployment who could start working again, but think they have it better not working. They would only make a little more, or even maybe make a bit less, if they went back to work. They would need to pay for clothes and gas, and miss out on time with friends. People may stay on welfare their whole lives because if they make too much money, they lose their welfare benefits. It seems like they are stepping down in their situation.
Likewise, many people have good jobs, but spend all of their money on stuff. They eat out a lot. They take lavish vacations. They have every technology device known to man and spend thousands each year on subscriptions. They spend every dollar they have each month and then run up the credit cards to finance the rest. They think that if they were to buy an older car, or eat in more often, or drop their cell phone plan, they would be reducing their standard of living. They see any reduction as leaving the peak.
The thing is, there is always a decline when you leave a peak. It is also a hard struggle to climb up to the next peak. It is difficult to leave a job to get an advanced degree. It is hard to leave welfare and start working for a living. It is difficult to eat in and drive used cars when everyone around you is eating out and buying new cars every three years.
But when you do so, you find higher peaks. You leave welfare, work your way up in a company, and suddenly are earning $80,000 per year instead of getting $20,000 per year for “free” from the government. You leave a clerical position paying $35,000 per year, spend a couple of years in school earning nothing while you get an MBA but then land a management job paying $60,000 per year. You move out of your parents home and suddenly need to pay for your own rent and food, but you get the freedom and sense of pride that comes from being an adult rather than a 20-something teenager.
You drive an older car, eat your lunch at your desk, cook at home most nights, and stay in an apartment for a few extra years while you save and invest. When you are 40, however, you have a paid-for house and $500,000 in investments when all of your friends have no equity in their homes at all and $30,000 in credit card debt. You buy a vacation home for cash while your colleagues are all wondering how they can get rid of their time shares. You have $5000 in extra income coming in each month from investments and can send your kids to college with your cashflow while your friends kids are taking out student loans. You have the peace of mind that you could be just fine if you lose your job, while your friends are trapped working, knowing that their lifestyle would start to come crashing down if they missed a single paycheck.
Are you really on top of the world, or are you just at a relative maximum. Would things be better through that valley on the peaks on the other side? Are you able to make that climb?
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
photo: Martyn E. Jones