Poor money management when you are a young high earner is mostly about what you don’t do and less about what you do do. After all, what’s the point of saving, building a pension/401K, investing and generally conservative with money when you are earning so much and have so much ahead of you.
Playing Fortnite, going out, shopping and working hard leaves very little energy, inclination or time for managing personal finances especially as its hard, boring and the benefits so long in the future — that $100 you put in the investment account you may not touch for 30 years or more — a lifetime away.
It’s a well-documented phenomenon that being a young high earner is not necessarily a guaranteed road to lifelong affluence and comfort. Doctors, Lawyers, those working in Tech and Finance are the highest-paid young earners in the US. The highest-paid of these are Physicians — and yet even they often struggle with money. Read this excellent article “Why Doctors Aren’t Rich” by Dr. James M. Dahle aka The White Coat Investor.
The problem though is that the most obvious solution to this is education and awareness but this has failed. We just are not programmed to prioritize and make long term decisions with a low immediate benefit like this when we are young. By the time we are old enough, it’s too late. The result is that the average high earning professional will lose over their working life (~30 years) at least $62K* and if a couple around $125K. For some, it will be much more and we have not included the opportunity cost those funds could generate in that period.
This is how we got to those numbers — obviously, we don’t know what the next 30 years interest rates will be but it changes the degree of impact not the impact itself. The average person earning over $160K a year has $42K in their checking account paying next to no interest. Even if they have money in a savings account the top banks in the US pay only 0.02% more in interest on average than for checking and that is only 0.03%. The average Millennial has savings of $24K so we assumed an above-average earning Millennial will have twice that.
That $125 a month wasted on average, assuming that over this time these funds don’t increase which they will do for many as they progress up the career ladder. $125 a month may not be much to someone making net monthly salary north of $6–12K but put it relative to all the other things that you could pay for in the same range.
For an annual cost the options get better still.
And for the cost over your working life and your partners, it’s the substantial portion of the cost of raising a child in a middle-income family in America at $233K
For the lucky ones, this will make no difference, they will sail through life getting richer and more comfortable. The challenge for a great many though is that setbacks and unexpected events will conspire against their best interests. For these, they also lose the inherent resilience that comes with a disciplined personal financial strategy and plan, implemented from a young age. They will be f**cked.
The answer to this is a very simple and a well-trodden path of every New Year personal finance article e.g.
Doing this though and maintaining it to ensure that you are optimized all the time is the real challenge. We need a behavioural nudge to change behaviour where seemingly small but powerful changes in approach have a disproportionate impact on behavioural change.
Richard Thaler is the father of Behavioural Nudges and he won a Nobel Prize on the back of it. He popularised it’s use in Public Policy, for example in organ donation and pension reform and has been stuningly successful.
Put against the problem of financial discipline in Millennials leads to some interesting ideas but anything at the policy level comes with strong misgivings of privacy and government control and will take decades to put into practice.
An alternative approach would be just to make it really easy, almost automatic to model best practice in personal financial management. So we can not only offer people education and awareness about the benefits of financial management but make it fantastically easy as well to do it.
That would be truly revolutionary.
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