When you are young and new to your career, the temptation to spend more than you deserve is great. On your career path, you see people making big bucks and living affluent lifestyles, and it is easy to imagine that you will be there in a few years. Why not spend a little more than you earn now? You can always pay it back in a decade or two if you soar high in the middle of your career! This is a strategy known as Lifecycle Money Management.
This is a very compelling and tempting argument at the beginning of the career, but it hides a lot of flaws.
The basics of lifecycle money management
Lifecycle Money Management argues that you should spend money from a whole life perspective, which suggests that it is okay to spend beyond your means when your income is low (usually when you are young) as you can pay it back later, when your income is much higher.
Let’s say you start your career as a software developer. You get your first job with an annual income of $ 60,000 a year, but you find that senior software developers in your company make $ 150,000 a year and have great lifestyles. You decide to spend beyond your means by spending an additional $ 20,000 a year backed by debt, knowing that as a senior developer you can easily repay it in 10 years.
This is very similar to my own financial situation at the beginning of my career. After graduating from college, I worked in a research department where I was a research analyst. I saw people more advanced in my career path and made three times as much as I did, and I was very confident that I had the skills to get there in a decade or so. Because of this, I had a pretty strong license to spend freely.
It didn’t quite go as I planned.
The problems with lifecycle money management
On paper, Lifecycle Money Management sounds like a good idea, but it overlooks one big factor: it assumes that a person stays in their career and then enjoys very large income growth later in their career. This is a very dangerous assumption. As the Federal Reserve points out, many careers and life paths do not involve the large income increases required for lifecycle money management to work.
There are many reasons why this story doesn’t catch on often. You can stay in your career but not experience rapid income growth. You might get dissatisfied with this career and choose another one. Personal setbacks such as serious illness or injury can occur. You may have other personal goals, such as: B. More family orientation when you choose to have children. Or everything goes exactly according to plan but you are still unhappy because you are absolutely trapped in your career at this point.
In summary, Lifecycle Money Management greatly reduces your viable options for the future. If your plan doesn’t go well, you will find yourself in a situation of incredible debt and limited options.
Minimize debt when you are young
At the beginning of your career, when your income is low, do whatever you can to minimize debt. It is very likely that you have student debt on your plate and you should have a debt settlement plan in place to get rid of that debt as efficiently as possible. What about other debts?
In terms of car loans, you will likely need something for transportation and your first car will likely need a loan. However, you should avoid buying a high-end car for now. With a car loan, get a late, reliable entry-level car and drive it until it really needs to be replaced. If you are replacing it try to bring a large deposit (or pay it entirely in cash). A nice down payment will help you secure a low interest loan when you need to borrow another car.
Use credit cards for convenience and bonuses, but pay off the balance in full each month. Avoid any situation where you have funds on your credit cards month to month. If you find yourself getting into this state, stop using your cards for a while.
When you find yourself in a bad financial position, seek help instead of potentially burying your future. There are many resources out there that can help you restore your financial health safely and effectively.
Benefit from favorable life experiences at a young age
Don’t spend a lot of money on luxury experiences when you are young. Instead, use the qualities of youth – good health, good fitness, few stresses in life – to have inexpensive, life-changing experiences.
You should try to spend your 20s and maybe your 30s enjoying a variety of low-cost experiences to see what gets clicks for you. Later in life, health and obligations will diminish your options for such diversity, and this is the time to invest more and focus on the things that really click for you.
Consider spending some of your 20s doing volunteer activities like the Peace Corps, which is an opportunity to see the world at a minimal cost. Get involved in very low cost travel, take advantage of things like hostels and focus on low cost local experiences at your travel destinations, and travel alone or with a like-minded person. Avoid things like high-priced resorts or “travel destinations”.
Also try out lots of things where you live. Browse tools like Meetup and your local community calendar, and dive into free and affordable events and groups of all kinds to find out what it’s all about. These groups often help immensely with the cost of immersion in new things so that with minimal effort you can find out what really matters to you, have lots of new experiences, and meet lots of people.
This is actually one of the most important results of The millionaire next door by Thomas Stanley and William Danko. The authors surveyed thousands of people with net worth over $ 1 million and found that they primarily focused on low-cost life experiences earlier in life.
Live cheaply and socially with frugal hedonism
A big secret of frugality, especially at a young age, is that it is actually deeply social. Doing something super cheap or free thing for fun with friends or with people in your community not only provides a pleasant and interesting experience, but also a shared social experience.
This is the core idea of frugal hedonism. The idea is that you fill your life with a variety of inexpensive experiences, find the enjoyment of them, and do them with other people. Go hiking together. Make jam together. Looking for berries together.
Try to do things that you can easily do at 20 and 30 that might be more difficult at 50, such as: For example, play a team sport in a community group or hike the Appalachian Trail with just your backpack.
When things go well, invest aggressively
If you use these tactics and keep your expenses below what you made at a young age, you may find yourself embarking on your career path and seeing your income skyrocket anyway. That’s great! Having reached this point with minimal debt, not only can you afford to invest aggressively for retirement, but you also have the resources to enjoy more expensive things as you age.
In this scenario, you have a ton the freedom. You can invest like crazy and retire very early if you leave work at 40 or even 30. You can stay true to your career and enjoy some high-end experiences while saving well for retirement. You can afford to pursue a different career path if you want while still having financial stability. You can get out and stay home for a couple of years if you want.
The world really is at your feet because you are financially not tied to anything. You don’t have a huge debt burden that requires a high salary. So you can keep earning big if you like this life or easily jump to something else if you have different goals and motivations.
If things don’t go well, you survive
On the flip side, you may be in the majority whose path doesn’t directly lead to a huge salary. In this situation, you are not under a huge mountain of debt forcing your decisions. Rather, you have the ability to live a great, stress-free life, whether you stick with this career path or end up somewhere else entirely. If you land in an unexpected or unplanned place, you will not be burdened with deeply regrettable decisions from a past.
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