Did you ever flip through college catalogs and read how much money various college majors earned? Did those amounts sound astronomical back when you were in high school?
I remember reading that the average philosophy major from my university would get a starting salary of $20,000 a year. That sounded impressive.
When I was 16, I figured that $20,000 a year was a lot of money. Up to that point in my life, money was simply a tool that put gas in my car, bought clothes and took me out to dinner. $20 Grand could buy a LOT of dinners.
Of course, I was making the classic error of thinking that my spending needs as a 16-year-old would be representative of my spending needs for the rest of my life.
When I started college, I began paying for things that I never realized people had to pay for – like housing and groceries. Who knew that stuff didn’t come free?
Still, my housing and food costs were small in college, and I thought that I could live the rest of my life spending at the same rate that I did in college. The adults around me said that your expenses increase as you age, but I assumed they were talking about discretionary spending — keeping-up-with-the-Joneses’ type of stuff.
Graduating from college didn’t trigger any new bills. I avoided lifestyle inflation and spent money like a starving student, despite my full-time job, which enabled me to save enough to quit my job and travel for two years.
But I thought I could continue to spend like that forever. I made the error of thinking that my spending needs as a 25-year-old were representative of my spending needs throughout life.
Everything changed after I bought a house. Holy moly, nothing changes your spending needs like maintaining a house. What a money pit!
The mortgage is the least of it. I pay property taxes, homeowner’s insurance, water and trash. I need a lawnmower, a sprinkler system, several ladders, a seed spreader, an aerator, Termidor, a power-washer, weedkiller, lawn fertilizer, tree pruning, rakes, hoes, shovels, and that long tool that helps you clean the gutters. I need a drill, a wrench set, caulk, spray-foam and weatherstripping.
And that’s just routine maintenance … don’t get me started on things that break.
I’m beginning to understand a critical concept: my spending needs today don’t represent my spending needs in the future. Probably not by a long shot.
Eventually I’ll need to buy a crib, diapers, tiny little socks, a stroller, high chair, and pay someone to give me an hour of quiet time. Later I’ll need to pay for soccer uniforms, piano lessons, math tutoring and a much bigger gasoline bill. I’ll have to buy more health insurance, pay for braces and cave when my kid asks for a Playstation / puppy / iPhone.
When I retire, I might need to have my house medically retrofitted, pay several hundred each month for prescriptions or fall prey to scammers.
My sixteen-year-old version of myself had no idea that all these costs would loom on the horizon. Back in high school, it was easy to think that $20,000 a year was a lot of money. These days I don’t even think six figures is that much money anymore, at least not if you have to support a family.
Thanks to Werwin15 for today’s photo.
I think the term a lot of money is relative. The more I know about finance, the more I think I will never have enough money. My wife and I was talking about this the other day!
Our discussion resolved around child care, child education savings fund and maintaining our current lifestyle.
Good call on the house maintenance, that’s one people don’t factor in before buying. You reminded me.. I need to re stain my deck
@YFS – I know! It feels like the things to save for has no end. Child care, replacing your car whenever your current car dies, etc., etc., …. things most people don’t think about.
I can imagine it being all relative – $20,000 is a lot of money if you live at home and only buy gas, haha. It’s when you start to have adult responsibilities and ‘necessities’ to pay for – like food and housing – that you realize sums of money which once seemed huge are actually a stretch to live on.
At least you saw starting salaries from your University – I don’t know if I would have if I didn’t seek them out myself. I know many people pick careers with no expectation of what they will make starting out – sometimes to surprises.
@PK — Haha,I saw the starting salaries for my major/career, so I have no excuse for picking the low-paying path that I choose!!
I had no idea how to put that into the context of “all the stuff I’ll need to pay for when I’m an adult.”
Totally agree — I thought $40K was so. much. money. I could hardly expect to know what to do with all of it. Funny how perspective changes!
So true. Back in the day, I remember when I got my first job, and I had my first paycheck over $100/week. I was thrilled. I thought, “Why do grownups complain about money so much?” Well, now I see what they were talking about, and I’m not even 25 yet! I can’t imagine how much money I will need over my lifetime to have a financially sound life. I’m just so glad I don’t have to figure that out right now – I can take it one day at a time and get there when I get there.
>>> Eventually I’ll need to buy a crib, diapers, tiny little socks, a stroller, high chair [...]
Locks for the kitchen cabinets, safety inserts for the electrical outlets, removing everything breakable from low areas like coffee tables.
Saving for college begins the day they are born. Most undergrads at Georgia Tech wind up taking 5 years to complete their degree, so better to assume funding for 5 years. If they finish in 4 years, bonus!
From the time kids are old enough to reach out and grasp, they will be breaking things from time to time until they move out.
Don’t forget toys. Lots and lots of toys. Toys scattered all over, toys that go crunch under foot if you don’t watch your step. If you buy a minivan with lots of storage bins, the bins will soon be filled to the brim with toys that live in the car.
You will learn to dread three little words – “Some Assembly Required” – on Christmas Eve.
When you go on vacation, you and your partner will pack one suitcase each, and a u-haul trailer for the kids stuff.
Okay, some of that is tong-in-cheek — maybe you won’t need a u-haul — but kids can be classified as high expense / high reward.
I have to comment in all the stuff you THINK you’re going to need to buy concerning children: the cribs, car seats, toys, ect. If you’re willing to buy used or to take loans from friends on things like baby clothes, hand me down toys, hand me down strollers, don’t be afraid to do so! I have 3 young boys, and I never turned down freebies! Because of this, those costs were super low. Yes, I buy good car seats. But all else, I have gotten hand me down, and better yet, I pass those hand me downs from son to son. Cheap!
I also buy thrift store stuff for a lot of things in my life! Furniture, tennis rackets, clothes, toys, picture frames–you name it. So, these costs don’t have to be as expensive as you think. Because you’re right– even 6 figures is not a lot when you’re talking a family of 5!
Now…..the cost of daycare, that’s whole ‘nuther topic. That’s a freaking mortgage payment, and I’m not kidding! By the time our middle and youngest son are done with daycare, we wil pay out at least $40,000 more. WTF!! Lol
Serena
Thrift Diving
@ThriftDiving – No kidding about the daycare!! Here’s an interview I did with a couple from Portland, Maine who spend $1,400 per month on infant daycare. That’s a mortgage payment! http://budgeting.about.com/od/family_budgeting/a/True-Story-How-We-Budgeted-For-A-Baby.htm
When I was younger, I thought $100K was unheard of. Only doctors and lawyers bring in that much, right? Now it’s considered middle class (maybe upper middle in some parts of the country, but still middle class). In any case, any amount of annual income really doesn’t stretch as far as our teenage selves thought it would, does it?
What a great article! It’s so easy to think that what’s happening right now is the most important and that the money later will just somehow be enough. But as you’ve illustrated, what seems like a lot of money now could end up barely covering future costs. This article is a great way to start taking the planning of their finances for the future more seriously!
The shocker of my lifetime: child care. If you have a full-time job and children, you will need child care. Care for an infant in my neck of the woods: $300 per WEEK. Now that I have a 9 and 8 year old, they go to day camp in the summer when school is out. That’s $2K per month PER KID in AFTERTAX dollars. Children are the true luxury item.
It’s amazing how $20,000 can go through our fingers so easily. Before our daughter went to kindergarten the cost of daycare (a day nanny) was more than this.
I’m now out of school nearly 30 years, but I recall that even with a decent starting salary, having the feeling that I had less spending money working full time than when I was in school and living at home.
I’m thinking “a lot of money” would not only cover my needs and reasonable wants, but also wouldn’t require a lot of my time to earn. If I have to work 75 hours a week to earn $100,000, the pay sure doesn’t seem like much. Well, if I really loved what I was doing during those 75 hours, then I guess $100K would be plenty.
@Shawanda – The time/money relationship is massively important. There are some people who work 75-hour weeks for $60,000 and they think that the person who works 40 hours per week for $40,000 is “not making much.” But at an hourly rate, the $40K person is making far more!
I often see this play out with freelance journalists. We normally get paid “by the word,” which means many journalists evaluate how well a project pays by its per-word rate, rather than by the amount of time it takes to research and write the article. Sometimes (but not always), the “lower-paying” article can offer the higher hourly rate.
When I received my first salary, I thought it was fine but it was not. I got a 20% increase and I thought it was enough- but it was not. I got a second job, doubled my income and I thought it was enough-but it was not.
The more money I got the more reasons I had for spending. In short, I was a victim of lifestyle inflation.
And I finally have a solution which I got from reading financial blogs(and may apply for others with the same conditions as I am). It involves making a financial plan and closely monitoring cash flow.
@Belinda — Kudos to you for realizing that you were stuck in lifestyle inflation — and for getting out of it! Congratulations. Keep reading personal finance books and blogs, and keep watching your cash flow … it sounds like you’re on the right track!
I’m struggling to get out of it. Things are truly easier said than done. The main obstacle that I have in my way is my current debt. And I believe the same is true for a so many people.
So snowflaking debts are one of my activities. I take second jobs online and look for ways to save money. For those who are in the same position as I am, sites that might help are vworker.com, freelancer.com, odesk.com and elance.com (I’m not paid for advertising them…:)
Best regards,
Belinda
@Risk – Snowflaking is a great strategy for getting out of debt AND saving for a goal. I “snowflaked” a lot when I needed to save a lot of money, right after college. Congratulations for having a solid goal and for pursuing it. You’re light-years ahead of the masses of people who don’t act on their ambitions. You look for side jobs, you find ways to save — these are all great examples of acting on your ambition. Good for you!!
I’m thinking that money is a relative thing. When I was living with my parents I managed to save a nice stash. I add to it regularly, but I’m not saving for any goal in particular. My goal is to have enough money to quit my regular job. I don’t hate my job, but it takes up a lot of time, and I’d like to have that time to use for doing other things. I guess most people would consider $50,000 to be quite a lot of money. In my mind it is very little though, and I’m not being greedy. For example, if I was to buy a car, I could buy a 2nd hand car for $15,000. In a few years it will be worth about $5,000 and very difficult to sell. I will probably also have to repair it, and it will be just ok to own. If I buy a new car for $40,000, it will depreciate like crazy and be worth about $20,000 after a few years. It would hopefully work well for that time.
I would also have to spend money on fuel and maintenance. If I bought no car, I could invest the $50,000, and make 8% return, while adding to it. I might then have $60,000 instead of $20,000, and I could ride a bike.
So in this hypothetical situation I would be better off not owning a car at all. Then I might also want to make enough money to quit my job. If interest is at %4 per annum, I would need to make $1.5 million to have a basic wage of $600 per week. It’s important that I don’t lose what I’ve already got. Therefore I could work say 10-15 hours per week doing odd jobs, and live off interest of $1,000,000 and probably live a good life without needing to work full time. Ironically I used to be able to survive on much less than this. Even so it would make no sense to keep $1,000,000 in cash when you can invest in property. You could buy a lot of properties for $1,000,000 by borrowing more money. Ironically all I wanted to originally was travel around without having to get a full time job. The problem is that we get attached to the money, and then we die, and there’s none left anyway, because you need to pay all these bills to stay alive as you get older.
@Money — Slashing your expenses (e.g. having either a cheap car or not having a car at all) can definitely help you free up your time, because you don’t have to be in the rat race in order to maintain your lifestyle. But frugality is only the first step. To sustain a life outside of the cubicle, you’ll need to invest the money you save.
Property investing (which is what I do) is AWESOME. As long as you obey the 1 Percent Rule, which I write about on this site quite often, your gross income will be 12 percent of your investment. If 1/3 of that gets eaten by overhead, you’ll pocket an 8 percent return IN ADDITION TO any potential appreciation. If the property keeps pace with inflation (3 percent), your total net return will be 11 percent. This will pretty quickly get you to financial freedom.