When you are young and start a career, there are many temptations that will cost more than your income. On your career path, you will see that the people who are ahead of you earn a lot of money, live a rich lifestyle, and it is easy to imagine that they will be there in a few years. Why not spend a little more money than now? When you fly higher in the middle of your career, you can always recover the cost in ten or two years! This is a strategy called life cycle fund management.
At the beginning of one’s career, this is a very persuasive and attractive argument, but it hides many defects. Life cycle fund management believes that you should spend money from a lifetime perspective. It is recommended that you spend more than you can when your income is low (usually when you are young), because you can pay back when your income is much higher Suppose you have just started your career as a software developer. You got your first job with an annual income of $60000 a year, but you noticed that the senior software developers in your company earn $150000 a year and live a beautiful lifestyle. You decide to spend more than you can and spend an additional $20000 a year, financed by debt, and understand that you will be able to easily repay this money after 10 years as a senior developer.
This is actually very similar to my financial situation early in my career. After graduating from University, I worked in the research department as a research analyst. I see that the income of those who go further on my career path is three times that of me. I am very confident that I can achieve my goal in about ten years. Because of this, I feel a very strong license for free consumption. In theory, life cycle fund management sounds like a good idea, but it ignores an important factor: it assumes that a person will continue to pursue his career and then enjoy a significant increase in income later in his career. This is a very dangerous assumption. As the Fed pointed out, many careers and life journeys do not include a significant increase in the income required to make life-cycle fund management work.
You may continue to pursue your career, but you will not experience rapid income growth. You may be dissatisfied with that career and choose a different one. You may encounter personal setbacks, such as serious illness or injury. You may eventually have different personal goals. For example, if you decide to have children, you will pay more attention to your family. Or, everything may go exactly as planned, but you are still unhappy because you are completely immersed in your career. In short, life cycle fund management greatly reduces your viable options for the future. If your plan doesn’t go well, you’ll end up in debt and limited options. Try to reduce debt when you are young. At the beginning of your career, when your income is low, try your best to reduce debt. You are likely to bear student debt. You should make a debt repayment plan to get rid of debt as effectively as possible. What about other debts?
In terms of car loans, you may need some means of transportation, and your first car may need a loan. However, you should avoid buying high-end cars now. Buy a new, reliable entry-level car with a car loan and drive it until it really needs to be replaced. When you replace it, try to bring a large down payment (or pay it entirely in cash). If you have to borrow another car, a good down payment will help you get a low interest loan. Use credit cards, use them for convenience and reward, but pay off the balance in full every month. Avoid any situation with your credit card balance every month. If you find yourself sliding into that state, please temporarily stop using your card. If your financial situation is not good, please seek help, rather than may put your future in trouble. There are many resources available to help you recover your finances safely and effectively.
Don’t spend a lot of money on luxury experience when you are young. On the contrary, take advantage of the attributes of young people – physical health, physical health and less burden of life – to enjoy a low-cost life changing experience. Your goal should be to enjoy a variety of low-cost experiences in your 20s or even 30s and see which clicks are right for you. Later in life, health and commitment will reduce your chances of gaining this diversity. That’s when you spend more money and focus on what really suits you. Consider spending some time in your 20s doing volunteer activities, such as the Peace Corps, which provides an opportunity to see the world at the lowest cost. Participate in very low-cost travel, use hotels, etc., and focus on the low-cost local experience of the destination, traveling alone or with like-minded people. Avoid things like expensive resorts or “destinations”. Try a lot of things where you live. Learn more about tools such as meetup and local community calendar, and learn more about various free and low-cost activities and groups just to understand their contents. These groups usually provide great help in the cost of getting involved in new things.
This is actually one of the main findings in the. The millionaire next door is Thomas Stanley and William Danko. The author surveyed thousands of people with net assets of more than $1 million and found that they focused on low-cost life experience, especially early in life. One of the great secrets of frugality, especially when you’re young, is that it’s actually very social. Doing something super cheap or free on lark with friends or people in the community not only provides a pleasant and interesting experience, but also provides a shared social experience. This is the core idea behind it – frugality and hedonism. The idea is that you should enrich your life with a variety of low-cost experiences, find the fun, and do it with others. Go hiking together. Make jam together. Looking for berries together. Try something you can easily do in your 20s and 30s, but it may be more difficult in your 50s, such as team sports in community groups or walking on Appalachian trails with only a backpack.
If you use these strategies and keep spending below what you earned when you were young, you may find yourself on a career path and see your income soar anyway. That’s great! Since you have reached this point with the least debt, you can not only actively invest in retirement, but also have the resources to enjoy more expensive things as you grow older. You can invest wildly, retire early, and leave your job in your 40s or even 30s. You can stick to your career and enjoy some more high-end experiences, even saving for retirement. If you want to jump into different career paths while maintaining financial stability, you can afford it. If you like, you can drop out of school for a few years and be a full-time parent.
You don’t have a heavy debt burden and need you to stick to a high salary, so if you like that life, you can continue to make a lot of money, or if you have other goals and motives, it’s easy to jump elsewhere.