The more you know, the easier it is to make better decisions. This is why every pilot takes the time to learn about their aircraft systems, weather, routes, destinations, and everything else related to a flight.
Knowledge and awareness are key to building wealth, and when it comes to your financial life, being well-versed in the most important topics is critical. If you take 14 minutes, 1% of your day, to read and learn more about important financial topics, you will significantly increase your ability to build and maintain wealth over your career. To get you started, here are the 10 most relevant financial topics that all pilots should understand and master.
#1 – Money
Money is three things: a tool, an indicator of how much value you have or have delivered to others, and an indicator of your financial discipline. Money is a tool to purchase things in life (such as experiences, protection, freedom, material objects, etc.) but is only acquired by delivering something in return. When you fly, you are delivering a service that is valued at or above what you are being paid. The more value you deliver, the more you can earn throughout your career – both as a pilot and in other endeavors. To maintain a store of money, you must exhibit financial discipline.
#2 – Asset vs. Liability
An asset is something you acquire that pays you income or appreciates in value. A liability is something you acquire that costs you money or prevents you from making money. Buying (or renting) a bigger home is a liability. Buying an investment property is an asset. The larger home costs you more money each month whereas the investment property makes you more money each month. The rich get richer because they buy assets, not liabilities, and you should work towards the same. When you do, you’ll find that you increase your wealth much faster than you could have imagined.
#3 – Net Worth
Your net worth is the core driver of being able to live the financial life you want. It is everything you own minus everything you owe. When you take on debt, you invariably lower your future net worth. When you pay off debt, make investments that appreciate, or buy assets that generate additional income, you increase your net worth exponentially over the long term. You should track your net worth monthly and take actions that increase it. You free up money to build your net worth by wisely managing your cash flow.
#4 – Cash Flow
Your cash flow determines your ability to increase your net worth and wealth over time. It is simply the gap between what you have coming in (income) and what you have going out (expenses). When your expenses are less than your income, you have free cash flow. Free cash flow allows you to make investments, buy assets, and cover unforeseen events when they come up, all of which build your net worth. To build significant wealth, work to increase your income, cut your expenses, or commit to saving 50% of every pay raise and bonus until you have free cash flow of at least 30% of your income.
#5 – Economic Cycle
The economic cycle refers to the ups and downs of the economy. When times are good, the economy is said to be in an “expansion”, and when times are bad, the economy is in “contraction.” Airlines and construction are the two industries most affected by the ups and downs of the economy. Every pilot should be aware of whether we are in an economic expansion or an economic contraction and realize that it will always operate in a cycle. Currently, the airline industry is in a massive expansion and in high demand, but can (and likely will) slow when the economy turns. This simply means you need to be aware and prepared for changing times by controlling your lifestyle, creating multiple income sources, and building up reserves.
#6 – Lifestyle Inflation
“Lifestyle inflation” is based on the reality that most Americans consistently increase their lifestyle (standard of living) each year by spending more. It is the effect of spending a raise or bonus on liabilities and not assets, and often, spending that raise before it actually happens. While you should allow yourself to increase your standard of living slightly each year, you need to maintain awareness around how much you’re increasing your savings. To manage lifestyle inflation, don’t spend a pay increase before it shows up in your bank account and commit to saving 50% of every pay increase to build your assets and wealth. Until you max it out, your retirement plan is a good place to start.
#7 – Retirement Plan(s)
While everyone has a different definition and vision for what retirement might look like for them, every airline pilot will face mandatory retirement from the airlines. To financially support yourself after that time, most regional, all major, and all legacy airlines offer a Qualified Retirement Plan. Sometimes referred to as a 401(k), B Plan, 401(a), Profit Sharing Plan, or other names, all essentially refer to a tax-advantaged savings plan for your retirement years. Every pilot needs to know exactly what their company puts in or matches on their behalf, what profit sharing exists, and what the limitations and options are on the plan(s). You should also be aware of non-qualified retirement plans (“deferred compensation plans”) and the risks associated with these. Your union or HR representative can provide you with a summary of all your retirement plan benefits – get these and take the time to read and understand them to make sure you aren’t leaving anything on the table.
#8 – Interest
Interest can be looked at from the perspective of someone borrowing money and from the perspective of someone lending money. If you are borrowing money (using debt), you are paying someone else interest for the right to borrow that money. If you are the person lending money, you are earning interest on the funds you lent to the other person. Someone is always earning interest and someone is always paying interest, and without fail it’s the person earning interest who is growing their net worth faster. When you borrow money, the cost of borrowing is the interest you pay plus the missed growth and income you could have made from investing that interest amount in assets. Bottom line? Earn interest, don’t pay interest, if you want to be wealthy.
#9 – Investment vs. Speculation
Buying a stock, a mutual fund, real estate, or a business on the recommendation of a friend, TV personality, article you read, or a gut feeling is speculation. Buying one of these at a good or fair price after thorough education, research, and analysis is an investment. Speculation is akin to “winging it” with your financial life, and while you can (rarely) hit it big, you are statistically much more likely to lose a bit. Take the same care that you do with flying and know exactly the type of investment you are purchasing, how it works, what could go wrong, and what to do if it goes wrong. Doing so will greatly increase your progress towards building wealth.
#10 – Alternative Minimum Tax
Once you join a major or legacy carrier, or build seniority elsewhere, you will likely start earning fairly high income, often above $200,000 or $300,000 a year. When that happens, you run the risk of facing the Alternative Minimum Tax (AMT), a decades old tax that impacts more high-income earners every year. Without an understanding of the differences and impact of the AMT, you could end up paying significantly more in taxes over your career than need be. When you get to this income range, consult with a good CPA (Certified Public Accountant) or tax attorney to make sure you are proactively taking steps to minimize the impact of the AMT. After all, the more you save in taxes the more you can put towards assets and growing your net worth!
Knowledge and awareness are two of the easiest elements of your financial life to acquire, but often are neglected among pilots. Take the time to understand these 10 topics and you’ll be well ahead of your peers and pointing in the direction of building (and keeping) significant wealth!
PS – Want a free copy of my book, Million-Air: Strategies For Pilots To Build Significant Wealth? Head to AirspeedAndMoney.com/freebook.