The other day my friend told me about a woman named Rachel who had applied as a tenant for his rental property. Rachel was a 40-year-old, in-house attorney that made over $150,000 a year. And yet she had no savings, $70,000 in student loans and a poor credit score. On top of that, she was single and had been making six figures for more than ten years.* Without exceptional circumstances, someone like Rachel must have never saved a penny.
So I thought to myself, what if had never saved? Or, what if I had started saving earlier?
If I Had Never Saved
Thanks to the first three years after college, I can imagine a life without savings. During those years, I had traveled to Asia and lived almost paycheck to paycheck off a $24,000 salary. The few times that I called home to my parents were to ask for money because I had run out. I spent everything on fancy restaurants, taxi cabs, alcohol and weekend trips to neighboring countries. On a positive note, I never missed a credit card payment or rent, and I didn’t have $70,000 in student loans. Nonetheless, if I had continued this lifestyle I would’ve had nothing to my name and could never support a family. I wouldn’t have the willpower to bike or walk instead of riding cabs, nor the patience to cook instead of eating out. And I’d have constantly looked for more exotic and expensive places to top each new travel destination.
Unlike Rachel, I would’ve never made it to a six-figure salary. I’d spend the bulk of my mediocre income on a fancy apartment like my friend’s rental property and never even start a retirement plan or go to law school. My only solace would’ve been a decent credit score and no credit card debt.
If I Had Saved Earlier
On the other hand, if I had started saving earlier, I could be financially independent already. How do I know? Because saving money is addictive. If I had only realized the power of money to make more money (e.g., through investing), I would’ve stashed it instead of spending it.
I first started working fifteen years ago when I tutored kids for $20 an hour. Since then, I’ve always had a job until I went to law school in 2011. Then in 2014, I joined a big law firm that paid a six-figure salary.
But to get to financial independence today, I would’ve done a few things differently. For one, I’d have worked more hours and aimed to save 75% of my paycheck every year. That means about $900 a month during high school (or around $11,000* total). I would’ve gone to a public school for college and taken on more work-study opportunities, aiming to save about $4,000 a year (or $16,000 total for four years). I’d supplement that with part-time, off campus work and save an additional say, $7,000. Then I’d apply everything that I’d made so far ($34,000) to my student loans.
After college I’d continue to save 75% of my income, pay off my remaining student loans and perhaps not even go to law school. If I had on average saved just $33,000 a year (off a $44,000 after tax salary) I’d be at $330,000 today. And assuming a 9% average annual return on investment, I’d get $30,000 a year of taxable income by investing that $330,000 in an S&P 500 index fund. In other words, I’d be more or less financially independent.***
So where am I now?
Well my current net worth sits at $165,000, which isn’t awful for a 32 year-old guy. I’m still saving about 75% of my current salary and I’ll probably hit that magic $330,000 number in another year or so.
So I didn’t lose that much time by not saving earlier. And I don’t regret having traveled and enjoyed myself for a few years right after college. But nonetheless I’m paying for those years now with long work hours and three years sacrificed in law school. So in the end, it’s hard to say whether I’ve chosen the right path.
If I had to do it all over again, I don’t know if I’d start saving earlier. But there’s one thing that I am sure of – I don’t want to be a 40-year-old lawyer who doesn’t have enough money to rent my friend’s apartment.
*In case you’re wondering, my friend rejected Rachel’s application.
**This assumes that I started during my junior year in 2002.
***While I consider $30,000 a year in passive income financially independent, my goal is to save enough to generate more than $50,000-$90,000 a year. So just to be on the safe side, I’m aiming for $1,000,000.