This is the second piece in a two-part blog series covering my thoughts on “money”. If you missed the first part, catch it here.
On Tuesday, I took a time-centric approach to explain why we should spend more money sooner. For those who missed my last ramble and don’t want to go digging through your inbox, my thesis was as follows:
You only have so much time and so many opportunities in each stage of your life to do the things you want, so you need to take full advantage of these opportunities while you have the chance.
Today’s piece is once again inspired by some existential musings, but my thoughts are more quantitative and practical.
Last Thursday, my good friend Katie (of Money with Katie fame, check out her newsletter) replied to this tweet of mine:
I saw her reply when I was getting off the subway, and, ignoring the fact that she replied a solid eight days after I posted that tweet (her excuse was that she had been off Twitter for a week), I shot her a text apologizing for inducing a strong case of existential angst.
This text led to a full-blown back-and-forth about money and life and other random stuff, and the text conversation turned into a phone call while I was walking through Manhattan.
Somewhere in our discussion about money and goals and ambitions and anxiety, Katie mentioned a problem that she had been dealing with lately: she struggled to fully savor her successes because every time something went right, every time she experienced a “win”, she immediately grew fearful of losing that thing.
It’s something that we all wrestle with: you work so hard for something that the idea of losing it, the idea of having to start over, the idea of screwing up, is terrifying. And this state of constant risk-aversion eats away at your enjoyment of the thing itself.
I think this phenomenon goes back to how we are taught to think about money as kids. Money is “supposed to be” this scarce asset that must always be saved for an indefinite future. To quote myself from Tuesday:
“Don’t buy your coffee from Starbucks!” screams an army of Dave Ramsey acolytes. “That $50 per month will cost you $221,575 in 40 years! “
“Pour every nonessential dollar into your index funds!” shouts the FIRE movement’s loudest supports. “Every dollar spent now just pushes your retirement back further.“
And over time, well-meaning advice such as “Spend less than you make” has been warped into “Never spend or else.” And when you preach this long enough, people begin to believe it.
I, like most young people, grew up viewing money as this scarce asset that should be treasured and put away for safe keeping. Save every dollar, don’t overspend on anything, you know the drill. Make sure everyone else in your Uber Venmo’s you. Obsess over the cash in your checking account every week.
Me, on Tuesday
So of course, when we are taught to put money on a pedestal like this, our first thought when we do make more money is “how do I protect it?”
Now back to this conversation with Katie.
So she asked me, “Do you worry about money?”
After thinking about her question for a minute, I answered, “Not really. “
I certainly haven’t felt this way forever. Like I mentioned on Tuesday, I used to stress about money all the time, but I don’t feel that way anymore. I buy the stuff I want to buy and go on living my life.
However, while I was *aware* that I didn’t particularly stress about money, I had never thought about *why* I didn’t stress about money until this we had this conversation.
Funny enough, Bill Perkins (yep, I’m quoting him in my second-straight post) explained my thoughts better than I could in his book, Die with Zero:
After I’d gotten promoted to “head screen clerk” and was earning $18,000, I was able to move to Manhattan’s Upper West Side by sharing a studio apartment. My roommate and I put up a makeshift wall that gave me a quasi-bedroom the size of a pizza oven. I had so little disposable income in those days that if I didn’t buy a monthly subway pass, I was busted because I couldn’t afford full fare on a daily basis. When I’d take a date out to the movies, I’d be sweating bullets if she ordered a popcorn. Seriously. So I started driving my boss’s limo at night to earn extra cash. And I became super-thrifty, trying to sock away as much savings as I could…
…I was proud of my thriftiness, really pleased with myself for managing to save money on such a low income. Then, one day, I was talking to my boss, Joe Farrell, a partner at the company I was working for, and somehow we got to talking about my savings. I told him how much I had saved up–I think it was about $1,000 by then–thinking he would admire my money management skills. Boy, was I wrong!
This was his infamous response: “Are you a f***ing idiot? To save that money?” It was like a slap across my face. He went on. “You came here to make millions,” he said. “Your earning power is going to happen! Do you think you’ll only make 18 thousand a year for the rest of your life?”
Bill Perkins: Die with Zero
The main reason that I don’t stress all-that-much about money is that I’m aware of this concept highlighted by Perkins’s former boss: realistically, I’m going to earn a lot more money as my career progresses. So why should I stress about spending a relatively high percentage of my income now?
And we don’t have to make these financial decisions based on solely on ~vibes~ either (shoutout Kyla Scanlon). Let’s put some match behind it.
If you invest $6,000 every year for 40 years, you’ll end up with $2.2M, assuming the market averages 9% annual returns.
But what if you wait a decade to start investing? You would need to invest $15,000 a year for 30 years to hit around that same $2.2M mark.
Of course, the initial reaction to this data is, “Obviously you need to invest as much as possible as early as possible to make sure you have enough for retirement. Look at ~how much extra~ you need to invest to catch up later!”
And this is a really good argument supported by really strong data!
As long as you assume that you’ll make your entry level salary for the rest of your life.
Yes, if your starting salary is $60,000, and you think you’ll make $60,000 every year until you die, you should probably be pretty serious about making those investments. It’s much easier to invest 10% of your income each year than it is to invest 25% per year.
But you probably won’t make your entry level salary for your whole life. In fact, you’ll probably make a lot more. $60,000 in year one is very likely $100,000 in year five, and quite possibly $150,000+ in year ten.
And believe it or not, it is actually much easier to invest $15,000 a year from a $150,000 income, or even a $100,000 income, than it is to invest $6000 from a $60,000 income.
Yes, as your income scales, your expenses likely will too. But once you can cover your core expenses like rent, food, and transportation, your income tends to outgrow your future expenses. When your salary is $60,000, and you invest $6,000, your post-investment capital remaining is $54,000. If you make $100,000 and invest $15,000 (2.5x as much), your post-investment capital remaining is $85,000.
Even after investing $9,000 more per year, you still have an additional $31,000 to put toward a more lavish lifestyle. If you make more than $100,000, the numbers are even more outsized.
If you are confident in your ability to make more money as your career progresses, it really doesn’t make sense to stress too much about your money early on. You don’t have to dump every dollar in your early 20s into your 401k, and you certainly shouldn’t skip out on a fun ski trip with friends or some other experience to “save for retirement.” The best solution to pretty much all personal finance woes is pretty simple: make more money.
But this career progression and salary increase is easier to project when you work a more “normal” job. I write a blog for a living, meaning that my income is much more variable than it would be in a 9-5.
While Katie now writes for Morning Brew, the nature of her work as a creator is still inherently riskier than if she did something else too. God forbid, but if the advertising market rolled over and died tomorrow, or if our readers suddenly lost interest in either of our content en masse, our revenue streams would quickly dry up.
So Katie and I talked about these “worst-case” scenarios. If the writing thing died tomorrow, what would we do?
The answer is pretty simple: just get another job.
If you are a writer who knows a thing or two about finance that managed to build a mailing list of 25,000 readers (or in her case, 100,000+), it won’t be all-that-hard to find a job that pays $100,000+. Someone somewhere will hire you for your expertise, because you have a valuable skillset.
But this doesn’t just apply to writers. Startup founders, software engineers at early-stage companies, and anyone with a valuable skillset that has a “risky” job would be able to easily find more “traditional” employment if their current gig failed.
So basically, rock bottom is a good job with comprehensive health insurance.
Money can be a stressful topic, and the prospect of losing money is terrifying. But when you understand that your income will likely continue to grow over the course of your career, and if you have a skillset that makes you highly employable, you really don’t need to stress about cash all that much.
