Building a Nest Egg: A Path to a Better Life
Introduction
Income can accrue through various sources, including wages, salaries, gifts, and inheritance. Only a very few are privileged to have gifts or inheritance as a source of income. Moreover, it is not a reliable income source; it is conditional, non-recurring, and beyond our control. Gifts depend on the generosity and capacity of the giver, and inheritance depends on the inclination, preference, interests, and beliefs of the testator.
Wages and salaries are payments you receive for the work you have done or the value you may have created through your occupation. This income source is recurring, stable, and comes with the psychological satisfaction of being earned by applying your knowledge and skills for the benefit of others. Salaries and wages are a more permanent and reliable income source than gifts, donations, or inheritance. However, they remain susceptible to disruptions from outside factors, such as changes in employer fortunes, economic conditions, the relevance of your skills and knowledge, and competition from others with similar skills and expertise.
Our income helps meet our various needs, ranging from our necessities of food, clothing, and shelter to higher-level needs such as self-esteem, social respect and recognition, personal growth, and contentment. Income should address both current and future needs. The prudent approach is typically to allocate a portion of current income to current needs and save the remainder for future needs. However, once you have met your basic needs, you may aspire to meet some of the higher-level needs. Or else, money in hand might induce newer wants and desires, demanding a portion of your income. Hence, you require strong willpower to implement a balanced, prudent spending and saving plan.
Typically, most people focus on increasing their current income to expand the range of current and future needs they could meet. And by current income, they usually mean current salary or wages. Moving to a more lucrative position, working more hours, upskilling, or pursuing side jobs are common avenues adopted by most people to increase their current income. There is nothing wrong with any of these. However, there is a subtle difference between ‘working for money’ and ‘working for passion’. The difference and its importance for your well-being become clearer as you get older.
Our ultimate intention is to lead a better life, not merely to increase income and meet greater needs. Each of our income sources comes with both benefits and costs. Increased stress and reduced liberty are the leading costs associated with pursuing a higher income. Typically, we consider only the benefits and are oblivious to the costs while chasing our aspirations. While relishing in our potential gains, we are heedless of possible losses.
Increased income alone won’t provide you with a better life. Instead, a better life ensues from the degree of discretion in using that increased income for the well-being of you and your close ones. Your increased income will provide you with a better life only if it meets three criteria: 1) it increases your independence, 2) improves your financial stability, and 3) enhances the range of opportunities available to elevate the quality of your life.
Building an investment corpus and using its annual distributions to supplement your current income is an often-overlooked income source. It is less susceptible to external disruptions and interferences than the familiar income sources.
Nest Egg
In the United States, for universities ranked in the first quartile based on quality, student fees constitute less than 25% of annual income. In contrast, for universities ranked in the lowest quartile based on quality, this ratio exceeds 60%. At around 50% of their yearly income, endowment distributions are the largest source of income for high-quality universities. Endowments are financial assets owned and invested by the universities, returns from which partly finance the universities’ operations, faculty remuneration, research programs, and capital expenditures. There is clear evidence for the high correlation between the quality of an institution and the size of its endowment funds. Endowment funds provide institutions with a permanent source of income. Unlike government grants and alumni donations, it comes with no constraints or conditions, allowing the institution to pursue its well-thought-out academic and research programs independently. The financial stability provided by endowment funds will enable universities to make long-term commitments. The permanent nature of endowment distribution and the autonomy that accompanies it have given these universities the necessary resources to achieve the academic and research excellence they currently enjoy.
Just as these institutions do, people like us can also increase independence, improve financial stability, and enhance the quality of our lives by building a nest egg, investing it wisely, and using the return from those investments to meet our lower and higher-level needs effectively. Today, maybe 100% of your current needs are met through salary or wages. However, if you can save and invest a portion of your salary, wages, or business income wisely, over time, returns from your financial assets could finance a significant portion of your current needs. The less you rely on your occupation for financial support, the more empowered you are to pursue your passions and interests.
Many people believe that a well-paying career is the key to financial security. But a few months or years into the career, they realise that they are more stressed and enjoy life less than they did before starting the job. The yearning for financial independence remains unrealised despite increased affluence. It is because the affluence from the well-paying job has bred marked financial behavioural changes in them. Desires that were dormant and hidden in the unconscious previously have now surfaced due to the improved financial situation. They are also deeply concerned about losing the benefits they have recently gained and are currently enjoying. They now struggle to imagine living and surviving without the job and income, despite having lived a significant part of their life without it. They built a status around their current career position and became trapped by it. They attempt to resolve their recently arisen financial insecurities by increasing their spending, which also helps them maintain their self-imposed status. The resultant problem is that soon their income from the well-paying job doesn’t feel enough. So, they keep striving for more until it is enough. But no matter how much they strive for and receive, the ‘enough’ state is always elusive.
Building a nest egg and investing it wisely is a more relaxed and effective approach to improve our financial situation. But it requires a shift in perspective. Rather than striving for more, it involves making the best use of what you already have. Firstly, imagine a realistic nest egg you could build in two years. Then, start contributing a portion of your current income to it regularly, preferably monthly. The next step is to invest the corpus wisely, aiming to reach a level where your investment corpus could make a meaningful contribution to meet your current needs. It is a long-term process. Don’t expect things to come off easily. Today’s actions might take three to five years to show positive results. You must put in the effort and time, have patience, and persevere.
Independence
Building a large investment corpus through successful investing brings prosperity. But prosperity is not our end goal. The prosperity enables us to chase our goals and chart our own destiny. The investment corpus provides us with the independence to pursue work or projects that align with our interests and values. When you are working for another company, no matter how lucrative it might be, you work towards achieving the firm’s goals and realising the vision of its founders. However, you, too, have aspirations and interests that you haven’t pursued yet due to various constraints, mainly a lack of time and money.
Once you have a significant investment corpus, annual contributions from it could finance a portion of your current obligations. Income through corpus contribution is an internal and permanent source of income. External sources of income, whether salary, gift, donation, or government support, come with commitments, conditions, and influences that are never aligned with your long-term aspirations. However, a natural readjustment in your priorities in favour of your aspirations occurs once the distribution from your investment corpus gains sufficient scale to support a significant portion of your current and future needs. The readjustment is a consequence of the increased independence provided by the investment corpus. The less you depend on external sources of income for your current and future needs, the more your aspirations gain prominence in your life priorities.
Some aspire to travel, while others aim to write, spend more time with their families, or pursue a hobby. Some wish to move into a more calm or peaceful neighbourhood, while others seek a career change that better aligns with their temperament. But for most, these aspirations remain a distant dream. Their current situation, commitments, obligations, and responsibilities have forced them to put aside their aspirations for the time being. They are not free to pursue their aspirations. They lack the resources to pursue their aspirations. They hope to pursue them one day, but that day somehow remains distant all the time. Then one day, it is too late; there is no more time. Now they must live with regret for the rest of their life.
You don’t have to be one among them. It might be true that, presently, you lack the resources to chase your passions or aspirations. But the moment you take the first step towards realising your aspirations, however small that step might be, life somehow – I don’t know how – finds a way to reorient your destiny towards your ambitions and passions. You are not free from the outside unless you free yourself from the inside. The first small step towards your aspirations is, in a way, the first positive step towards freeing yourself from the inside.
Financial capital is one of the foremost resources, the lack of which is preventing you from pursuing your passions and aspirations. The most suitable and permanent solution to this shortcoming is building an investment corpus, the distribution from which could finance a significant portion of your current and future needs. Once you have experienced something good, you will fight to hold on to it. If you have tasted freedom through that small step towards your aspirations, your worldly commitments, obligations, and responsibilities can no longer restrain you from chasing your aspirations.
Financial Stability
Life is unpredictable, no matter how much we try to bring order to it. A highly predictable and organised life is not real life; it is just routine, which can be dull. Life’s unpredictability is what makes it interesting, meaningful, and even beautiful. However, unpredictable life events could include both beneficial and adverse events. Both are essential for a fulfilling life. Adverse events contain valuable lessons that lead to self-expansion and personal growth. However, we could buffer ourselves against the adverse consequences of such events.
A large medical bill due to a health emergency in the family, job loss due to company downsizing or economic recession, loss of shelter due to a natural calamity, are a few unpredictable adverse events that could jeopardise our financial situation. The events may be beyond our control, but our resilience in the face of them is well within our control. A significant investment corpus can provide financial stability against such unexpected adverse events. By increasing contributions from the investment corpus, we can buffer against the income loss or cost escalation without impairing our capacity to fulfil our current and future needs.
All worthwhile aspirations require long-term commitments. Financial stability allows us to make long-term commitments. Consider aspiring for a career change. Acquiring the necessary knowledge and skill set requires a commitment of at least three to five years. A precarious financial situation prevents us from making such long-term commitments. Financial stability instils the confidence that encourages us to pursue our passions and aspirations.
Everyone would have experienced times when things are going so well that life seems perfect. The need for financial stability seems trivial at those times. The trivial attitude will cause us to adopt new financial behaviours that could diminish the resilience of our finances against challenging conditions. I don’t know how many are conscious of it, but it is precisely at those moments that life throws a curveball at you.
The financial stability provided by an investment corpus differs from that offered by other sources, such as lifestyle changes, budget planning, or insurance. The primary difference is that you have complete control over it. You can use contributions from your investment corpus for any purpose that seems valid to you. You have full power to increase or decrease contributions from the corpus according to your changing financial situation.
Anyone who has experience with health insurance knows that it doesn’t cover all medical expenses; the coverage is conditional and left to the insurer’s discretion; the balance of power is heavily tilted in favour of the insurer. Despite being aware of that, many people endure such unfair treatment out of necessity. The financial stability provided by an investment corpus empowers us to walk away from any unfair situation without worrying about the consequences.
Bank regulators in all major economies conduct periodic stress tests on leading financial institutions under their jurisdiction to assess the financial stability of these institutions. They do so by evaluating the resilience of these institutions under various simulated economic stresses. We could emulate the same process to assess our personal financial stability. This way, we could roughly determine the financial stability required to pursue our aspirations and the size of the investment corpus that could provide them.
Quality of Life
Everyone aspires for a better life. This simple fact becomes complicated when we consider what could deliver a better life. For most people, it is about seeking pleasure and avoiding pain. For some, it is having a higher purpose and working towards it. You find happiness in the former and meaning in the latter. However, for both routes to deliver a better life, whether seeking pleasure or chasing a higher purpose, numerous external factors beyond our control should turn favourable. Such occasions do happen, but they aren’t ever-present. Moreover, when present, they aren’t available to everyone. Society contains enough of such prerogatives and unfairness. But life doesn’t. As far as I believe life is fair, and if you don’t think so, then it’s possible that you have a poor understanding of life. It is such a poor understanding that causes people to base the quality of their life on concepts such as happiness and meaning.
Psychologists have recently developed a concept called psychological richness. According to them, one should aspire for psychological richness, rather than happiness or meaning, for a better life. It is also the most holistic and egalitarian path to a better life. The opportunities for it are ever-present and accessible to anyone. The AI overview of a Google search for ‘psychological richness’ describes it as “a life filled with diverse, surprising, and perspective-changing experiences, characterised by mental engagement, novelty, and complexity, rather than just happiness or meaning.”
In simple terms, the key to a better life lies in having diverse, surprising, novel, and complex experiences and accumulating as many of them as possible. Even small events, such as watching a good movie, reading a book, or having an intense conversation with a friend, relative, or colleague, can provide such experiences. Similarly, larger and more complex experiences, such as working in the emergency room of a major hospital, conducting stem cell research, studying gene mutations, or participating in a space mission, can also provide a path to psychological richness. However, I am sceptical about the accessibility of such experiences to everyone. Just as the range of research a research institution can pursue is limited by its budget, the range of experiences that an individual can seek to achieve psychological richness is limited by their financial situation. As his financial situation improves, so do his opportunities for psychological richness. As the situation deteriorates, so do the opportunities.
The quality of your life is highly correlated with your financial situation, whether you choose happiness, meaning, psychological richness, or a combination of them, as your route to a better life. A significant investment corpus places you in a strong financial position. It enhances your opportunities for experiences that could elevate the quality of your life.
Social mobility is a principal driver of prosperity, whether for society as a whole or for individuals. Education, occupation, and financial resources are major factors that influence social mobility. For most people, the first two factors are settled by the age of twenty-five. Moreover, by the time you reach thirty-five or more, your education and occupation are less likely to provide social mobility, as you will have to compete with a younger generation of aspirants. Financial resources are a more reliable enabler of social mobility, irrespective of demographics, career, or time.
Conclusion
Investment income is seldom a primary source of income for most individuals, primarily due to the intangible and discreet nature of its benefits: independence, financial stability, and quality of life. However, the benefits of the most common sources of income, such as salaries, wages, donations, gifts, and inheritance, are concrete and conspicuous, while their costs are mostly inconspicuous. However, these costs can impede our journey to a better life. Many of these costs do not apply to investment income. We have seen how investment income has enabled educational institutions in the United States to achieve superior academic and research excellence. Individuals could employ the same strategy to achieve a high quality of life.
Increased independence gives us more leeway in charting our destiny. Financial stability provides us with the confidence to make long-term commitments to realise our destiny. Financial resources open more doors of opportunity for us to achieve higher-level aspirations, such as personal growth, learning, belonging, and community.
Psychologists posit that a better life comes from psychological richness. The diverse, novel, and complex experiences that contribute to a psychologically rich life require a permanent, unconditional, and free-from-external-constraints income source. The income source should increase our independence, improve our financial stability, and elevate our quality of life. Annual contributions from an investment corpus encapsulate all these characteristics. Therefore, if you haven’t made it yet, building an investment corpus should be made a top priority.
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