Apr 27, 2010

Follow Up to: Tips for Making More Money Long-Term for 20 Somethings

A few days ago, I wrote a post about how to make more money over your entire life. The trick? Believe you "need" more money than you do now and approach your life's choices based on that need... then save the difference in what you get vs. what you actually need. Always live below your means. Ok, this isn't revolutionary advice, but I got some interesting comments from my readers, and I wanted to respond.

Anonymous #1, from Kentucky, said "I like the idea behind this advice. I also agree to an extent. On the other hand, it's not just career choice that will determine the amount that you make, but geographic location as well. A $120,000 per year job to you is more like $60,000 per year here."


Anonymous #2 said "that was the most ridiculous thing I've ever read! ...No offense, but you are still a kid and have a lot to learn. Don’t get me wrong, you are way ahead of most other 20-somethings (not hard to do in this day & age, though!), but be careful about advice you are giving (or taking). Also – you could reach your $100K goal MUCH easier if you moved to a place with a lower cost of living."

While one commenter loved my advice and the other hated it, both had a similar comment on how my choice to live in California makes it more difficult for me to reach my financial goals. I disagree.

I've lived in many different parts of the country through my life, though perhaps never the places where the lifestyle is extremely cheap. But I'm not sure how much a move would save me, unless I moved back home and lived with my parents.

My rent right now is $630. With utilities that adds up to maybe $700 a month. Granted, in Detroit, according to Craigslist ads, I could get similar room in a 3br shared apartment for around $350 a month. I don't know Detroit so can't compare my nice neighborhood to the offerings on CL, but let's just say the rents for a room are half what I'm paying now.

Everyone seems to think living in California is impossibly expensive. It's not. It IS expensive if you want to buy a house here. Gas is a little higher than in the rest of the country. State tax is higher than some other states. Ok, it's not the cheapest place to live. But there are also a lot of opportunities for work here, especially in the areas where it costs more to live. So salaries do, to an extent, compensate for the difference. As my first commenter said, $60k in Tennessee is maybe equal to $120k in California. I'm not sure I agree with that math, but there's obviously some truth in it. I COULD move to a cheaper place, make less money, spend less on rent, and save the same amount. But I would have a very hard time finding a job in my industry outside of this area. If you're in an industry you can work in anywhere, then by all means, live somewhere more affordable. That doesn't change my argument that you should always think you need more money than you do, and that this thinking will help you earn more in the long run.

Now, commenter #2, who has worked as a hiring manager, made a good point. He/she said that once a candidate for a job refused to take the job unless given $5k more than the offer. Eventually, the company hired someone else. OK, I never said "be stupid." If you really want a job, are unemployed, and have no other options (if you "walk" will you be unemployed for another six months? Or are there other opportunities on the table) then take the job. My logic still works, though. If you think you need $x more per year, then you might get a side job, or seek out freelance income to meet your goals. You don't NEED to make the extra money through your day job. It doesn't hurt to push a little in negotiating but always be realistic. I took a big risk during my negotiations for my current job and it paid off. I was really nervous that it wouldn't, and I got lucky. I also knew that I was by far the top candidate for the role and my company really wanted to hire me. I also did not get what I asked for, but I quickly accepted a realistic offer that was still much higher than I was making at my previous job.

In comparison, I look at friends of mine in their 20s who are living at home or living in cheap apartments and thinking that they only need to make enough to cover life month to month. The fact is that your future salary is largely determined by what you make before it (not always, but having a strong salary history helps.) If you spend your 20s making a smaller income because you do not see a reason to strive for more earnings, then you will be at a disadvantage in your 30s. Again, I'm not saying this works for every field... some fields have set salaries. You can still make extra money. If you're fortunate enough to not be in debt in your 20s, take advantage of this and save as much as you can. The best way to save more is to make more. That's the math I believe in.

Commenter #2 also asked "Do you have a net worth goal you are aiming for by the time you are 30? Don't you think NET WORTH is a better goal than just "savings?" I keep track of mine yearly. I just looked back to what it was when I was 30. I did NOT have $100K in the bank then, but the net worth was $170K."

I am not sure what factors into Net Worth to be honest. Right now I'd say my "Net Worth" is my bank account... that is, the combination of my savings, Roth IRA, stocks, CDs, and other investment accounts. I don't own a home (again, that's one of the things that is too expensive for me, living in California) but I own a used car (it's worth maybe $2k, but I don't bother including that in my networth because I'll use it until it stops working) and a few other gadgets and things that I don't count.

So, commenter #2, what was that extra $70k including for your net worth at 30? Did that include a house? That makes complete sense, especially since you have a family. Since I'm single and could move to a job in another city at any moment, it doesn't make sense for me to own. So my whole Net Worth IS my bank accounts.

Thanks for all your thoughtful comments!


Anonymous said...

net worth is, put simply, everything you OWN, minus everything you OWE.

Net Worth is basically how much cash you would have if you sold EVERYthing today. Technically, that would include stuff like cars, furniture, jewelry, etc, but I don't include that either (even though the cars are worth approx $20K and paid off). And I agree with you about the cars - We are not going to sell the cars - we run them until they die! The house, we could sell at any time if we need/want to move - but I estimate it's value very conservatively when calculating net worth.

My (our) net worth at 30 consisted of about $90K equity in a house (the value of the house minus what we owed on it), cash accounts (mainly the Emergency fund), stocks, and retirement (and we had not been saving for retirement like we should have been!).

So far THIS year (in the last 4 months) - we have increased our net worth by $13,700 (that consists solely of increases in cash & retirement accounts, and decrease in mortgage balance). That may not sound like a lot to you, but keep in mind that we are doing this on a FAMILY salary of $80K (still with a stay at home parent caring for 3 kids - and man kids are expensive! but again - totally worth it). And it's not like we're living in the backwoods either. We live in the state capitol with 3 colleges and lots of stuff going on. Maybe a part of me was jealous of the $120K salary. Oh what I could do with a salary of $120K!! Effectively, I traded that $120K salary when I decided to have kids (I would be making that or more now if I didn't take the lower paying job with fewer hours) - and I have NO regrets! I wouldn't trade my life for the world! Those kids may be expensive, and we've made tons of sacrifices for them already (and they aren't even teenagers yet), but life is so fulfilling with them in it :)

But I understand your argument of needing to live where the work is. I am a CPA, so I can go anywhere. Apparently that's a huge advantage.

But sorry - I still disagree with the importance you seem to place on setting a salary history. We've seen in the recent downturn that salary histories mean nearly nothing. There are loads of people (I know several personally) who would die to get back the same salary they had just 2 or 3 years ago. All the work they did to build up their salary history was squashed with one lousy recession ;) Not arguing that you shouldn't negotiate - I've negotiated my salary AND benefits at all my jobs (most people are too scared to do this). But I would, instead, argue that every one needs to learn to live BELOW their means - Pretend like they make less than they do (not pretend like they need more). Similar argument, but not the same. Cutting costs, IMO, yields a better result than "chasing a salary." It's something that most people have more control over - and can be done more consistently over time. If a person cannot cut costs, then by all means get another job - even if it's at McDonalds. Cut Costs and save save save! Especially when you are young! You are right - that compound interest is like magic ;)

Anonymous said...

Let me rephrase that second sentence...
"Net Worth is basically how much cash you would have if you sold EVERYthing today AND PAID OFF ALL YOUR DEBTS."

sorry I forgot that part.

her every cent counts said...

@Anonymous ok. I have no debts, so my networth is the same as my savings.

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