Retained Earnings

Historic American Buildings Survey, Creator, and Martin Luther Hofherr. Hofherr Round Barn, County Road 650 West, Yorktown, Delaware County, IN. Indiana Delaware County Yorktown, 1933. Documentation Compiled After. Photograph.

Have you ever read through the balance sheets of publicly traded US companies? In them you may have seen a category called “Retained Earnings”. Simply put, these are earnings that are what is left of a company’s net income after paying out dividends to shareholders (if applicable). These earnings can be held by the company and accumulated annually over time until some future date when decisions are made to use those earnings to sustain and improve a company’s competitiveness. This business practice of retaining earnings can not only contribute to the underlying financial wealth and health of good companies, but it can also contribute to your efforts to cultivate multigenerational wealth as well. 

Why adopt this business practice

The retention of earnings can help to ensure that, when the need arises, you and your loved ones are in a position to grow and thrive in life despite what unknown challenges and opportunities may come your way. Because we all lead different lives, however, retained earnings can look very different for each us. For some, it might mean taking whatever is left of a paycheck after covering our living expenses, savings commitments, and charitable donations and putting it into a personal development fund to be used to cover the costs of trainings that will help you update your profession skills in your current or future jobs. For others, retained earnings might mean taking the time now to develop health eating and physical activity habits that will enable you to potentially avoid preventable ailments and challenges that can appear later in life as we age. While our motivations for accumulating retained earnings may prompt us to start build them, these motivations alone are not enough to put this business practice into action and to sustain it over time. 

A perilous ride / Platt Brothers, artist and photographer,12th St., N.W., Washington, D.C.
Washington D.C, 1884. [Washington, D.C.: Platt Brothers] Photograph.

What mindset helps maintain a retained earnings balance

The maintenance and growth of your retained earning balance requires a mindset that includes two fundamental characteristics. First, you must have a future oriented mindset that is narrowly focus on particular aspects of your future. For example, retained earnings should not be thought of as a rainy day or emergency fund. These earnings should be used selectively to sustain and improve yourself or your loved one professionally or personally. The use of these earnings should increase your wealth beyond the value of the earnings being spent. For example, if the earnings are used on trainings to update my computer literacy skills to make a career change that will bring in a larger income or be a healthier work environment that allows more time with family and friends, then spending the earnings makes sense.

The second fundamental mindset characteristic, which is typically harder to maintain than the first, includes a commitment to not spending all the wealth you presently possess, if you do not have to. This characteristic can sometimes be problematic because people can have difficulty remembering that retained earnings need not require sacrifice. For example, during the Summer an aunt’s garden may produce too many tomatoes for her and an uncle to eat while they are ripe on the vine. One option is she could consider attempting to make tomatoes the main ingredient for every meal and eat the tomatoes as quickly as they ripen on the vine throughout the Summer. A second option is she could just forget about eating any fresh tomatoes and focus on preserving them for consumption later in the year. A final option that is more aligned with a retained earnings mindset is this aunt could first make fresh salsa for family and friends and include freshly sliced tomatoes in a few meals throughout the Summer and then can diced tomatoes, freeze homemade spaghetti sauce, and store tomato seeds for later use when needed. In this final option, the present wealth produced by the garden gets enjoyed immediately, but not exhausted until long after the wealth was originally obtained.  

United States Extension Service. Woman Displaying Jars of Canned Food. , 1931. Photograph.

How to put this practice of retaining into action

A quick review of the “Retained Earnings” category appearing in the balance sheets of various companies quickly reveals some companies are better at retaining and accumulating earnings over time than others. In large part, the differences can be explained by the conscious effort each company makes to set up a method for retaining earnings. We can use a similar method in our own lives to do the same. The steps for what that method might look like for you is outlined below:

       1) Develop & maintain a retained earnings mindset.
2) Identify motivation(s) for accumulating retained earnings.
3) Select a set of circumstances under which you would use your retained earnings.
4) Consistent collect retained earnings.
5) Maintain a record of your retained earnings.
6) Use retained earnings as determined by Steps 2 & 3.
7) Reassess Steps 2 & 3 and repeat Steps 4-6.

Cultivating retained earnings for multiple generations

As publicly traded companies have demonstrated for decades, retained earnings are a source of wealth that can make significant contributions to the long-term successes of you and your loved ones for generations to come. Such wealth, however, does not grow automatically. It requires foresight, judicious decision-making, and conscious effort to cultivate and maintain over time. Additionally, building this type of wealth suggests that starting today is better than starting tomorrow. If you are looking for a simple way to start building your retained earnings balance today, then consider putting together a list of at least 5 books you have read or listened to that have some value. Books are an excellent source of retained earnings that authors share with us all and have remained a consistent source of building multigenerational wealth for centuries. I look forward to seeing what books you recommend are worth sharing with me and others as we cultivate of multigenerational wealth together.  

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