Interesting comparison... Did you play with your number to find out what would be the result if Fred was starting at 35K? or 40K? I don't know about the states, but starting at 35-40K is definitely not impossible in Canada after getting a bachelor degree. I personally started at 30K and by the end of the very same year I was making 42K.
With the cost of living, I highly doubt that Paul will be able to save 10% of his income. Chances are that he will borrow 10% of his yearly income every five years to keep up with his lifestyle ;-)
I don't think Paul would finish with any close to 1M$ since I hardly know people that are able to save with $9/hour starting salary.
The main reason is because the fixed expenses (such as rent) will be more likely to be the same amount in term of dollar for Fred and Paul but will be a lot more different percentage wise. As an example, a $500 rent a month on a $27,000 year salary is 22% of Fred's before tax income. The same rent on a $18,616 (40hrs @ $8.95) is 32% of Paul's before tax income.
If you add up food, transportation and utility bills (they should be the same for both of them), my bet is that Paul will be left with nothing but debts at the end of the year ;-)
plonkee
· 1 year ago
I guess it illustrates the concept that it's not what you make, it's what you keep that really determines your wealth.
And also I think that it shows that if you go to college you might have more potential to be rich, but potential is nothing if you don't deliver.
Steve
· 1 year ago
@TFB: If Fred starts at 40K, then he ends up at 65 with almost $1.3 million. I chose 40K because I looked at some salary statistics and that's an average starting salary for a "finance analyst." I'm sure in big cities it's more, small cities less. One of the big variables would of course be where they lived. If Paul and Fred both lived in a big urban area - Chicago, Toronto, New York - the cost of living would be prohibitive because cheap rents would only be available with horrible, long expensive commutes, so Paul would be a significant disadvantage early on. In smaller towns it might flatten out - where I grew up, in a town of 10,000, the cheapest places to live and the most expensive were all within 15 minutes of the town center. You're right - the discipline to save 10% of your income is tough when you make very little, but judging by most of the statistics I read, making a lot of money doesn't make people more likely to find it easy to save 10%, either! Maybe the argument is in favor of finding less expensive places to live...
@plonkee: Yep, yep, yep. Your statement is 100% true. Wealth and income are two different things - people with low income can be wealthy, and people with high incomes can have a low net worth. It's having the discipline to save SOMETHING that makes all the difference.
bubelah
· 1 year ago
When I was 18, I was making a min. wage of $5.50 - $6.00 living in NYC with my parents. I managed to have $800 in my bank account within one year. Plus, I still spent on some clothes and accessories like any normal girl would. Everything is possible, if you are disciplined enough to save and invest early on. When I graduated from College I was offered $50K + $10 signing bonus my first year. That was very unusually high, whereas my fellow graduates were getting offers $35-$40K at best. BUT, I didn't start investing in my company's 401(K) till a year later. Not because I was not disciplined but because I didn't know anything about 401(k) and investing. Sounds funny for someone who majored in Finance and Investments.
FourPillars
· 1 year ago
Great post and a very interesting comparison.
One point you didn't mention is that during their working years, Fred (college dude) would have a much higher standard of living than Paul which has to be worth something.
One other key point (and I know there are 14 million possible scenarios) is that you assume both men save the same amount of after-tax income which is a valid assumption but the fact is that Fred (college dude) has the opportunity to save a much higher percentage of his after-tax income than Paul does which if taken advantage of, might tip things toward Fred.
Mike
Steve (Brip Blap)
· 1 year ago
@FourPillars: Mike, glad you liked it. Your right, Fred probably does have a much higher standard of living during that time period, although I would counter by saying that if they were to retire at the same total level of savings (i.e. both stop once they've saved $500,000 or whatever) Paul could have spent a lot more along the way.
I have to disagree completely about who can save a higher percentage of their income! Anyone can save higher or lower percentages of their income - your income level has very little to do with it after you're making enough for rent, etc. Fred might have a lot more income, but if he's got a higher standard of living - like you mentioned - then he probably spends 90% or more of his after-tax income, just like Paul. I know people who make much less than I do who still save as much or more than I do, and I know people who make a LOT more who save almost nothing. Fred has an opportunity, sure, but so does Paul - it's all just relative to the level of comfort you require. I also know people who make as much as I do but live a substantially simpler lifestyle in cheaper locations, and therefore save a lot more.
I could go on and on but I think there's a thought process that says people with low incomes can't save - there's some magic number over which saving gets "easier." There isn't - 99.9999% of the people in North America try to live up to the level of their income. If I could travel back in time to tell 1994 Steve how much he would make now, he would be blown away and figure he could save 50% of his income - but instead, even living a very frugal lifestyle (we save about 25% of our net income) there are a million ways I could cut back further, and don't, because I don't want to face life without Netflix ... for example.
That's a mini-post in the comments. Whew.
Steve (Brip Blap)
· 1 year ago
By the way, if anyone wants the actual spreadsheet I'll be glad to email it to you - although I didn't do a lot of labeling or explanation, so it may take a while to puzzle out! Just use the contact form or email me at bripblap---at---gmail * com.
FourPillars
· 1 year ago
I hear what you are saying but I still have to disagree. FB noted quite accurately in the first comment that someone making about $18,000 will have to spend a large portion of their net income just to stay alive. As you pointed out, the region where they live will make a big difference.
Someone who lives alone in a bigger city and makes $18,000 / yr does not have the same opportunity to save as the comparable person who makes $45k/yr. I also don't agree that most people will live up to their salary. Most people I know do raise their standard of living as they make more money but they also raise their savings rate as well.
Mike
SavingDiva
· 1 year ago
I feel ridiculous for waiting until I was 24 1/2 to start saving for retirment! I had a mutual fund (with less than $3k in it), but no retirment funds...I guess I'm playing catch up now...
FourPillars
· 1 year ago
SD - saving for retirement at 24 and more importantly, thinking about retirement at age 24 is awesome - way ahead of 99% of the population.
Mike
Mrs. Micah
· 1 year ago
I like plonkee's comment that it's what you keep that matters. Another important question is whether they were able to do what they wanted with or without college. I.e. Micah's telos is to teach people--specifically to teach them how to think (not what, but how). And he can't really do that without a PhD in philosophy. Me? I think my debt-free education enriched me, though I could have probably done without it.
Steve (Brip Blap)
· 1 year ago
To Mike (Four Pillars) comment to SavingDiva: ditto! 24 is still a looong way ahead of most of the population.
Mrs. Micah: you're right, and the argument can be made that a lot of people "waste" their college years pursuing, say, an art history degree only to get a job in banking. I say "waste" because, of course, that's all part of the journey that got you from point A to B and therefore it's never really a waste :)
plonkee
· 1 year ago
Actually, I think that Paul (the non-college guy) is probably spending about the *right* amount for his income. I mean the standard rule of thumb is that you need two-thirds of your salary in retirement.
If you spent 4 years at college and accumulated debt, then you need to save a lot more than 10% of your salary to maintain the constant (but slightly lower) level of expenditure throughout your life and into retirement.
deepali
· 1 year ago
Great little exercise, but I have to admit, I found it useful for only one thing - the comment someone made earlier about what you keep. If Fred put away more of his income and didn't live like he earned $180K, he'd likely be better off than Paul in retirement. And the chances that Paul is saving 10% are pretty close to nil, even in a small town. His chances of not having debt are smaller. Statistically, those without a college education are more likely to file bankruptcy (as well as those who make less than 30K) While your Fred is unfortunately realistic, your Paul is unfortunately not.
And something got missed. It's not always about where you end up, but also about how you got there and what you did along the way. College is expensive, but there are intangibles that are priceless, like experience and opportunity.
All that being said, I agree with your conclusions, and would add another - if you do choose the more expensive school, be both frugal and creative. There's nothing wrong with working through college to help minimize the loan too.
deepali
· 1 year ago
Oh and regarding: "I could go on and on but I think there’s a thought process that says people with low incomes can’t save - there’s some magic number over which saving gets “easier.” There isn’t - 99.9999% of the people in North America try to live up to the level of their income."
Actually, there is - it's 40K. I know you read Penelope Trunk too. :) But sadly you're right, most people aren't really saving that extra income, but trying to spend it as fast as they can.
JimB
· 1 year ago
This is a really useful baseline model, but as you point out there are some many simplifying assumptions. Two key factors that will influence outcomes but are difficult to plug in to the model are what opportunities present themselves to Paul and Fred, and how they really go after those opportunities.
One take away for me from this model is that if you are going to go to college do it sooner rather than later in life to minimize your oportunity cost.
I went to business school in my early 30's, so I had the opportunity cost of real lost income and lost savings ability at school before getting back into the workforce. I'm not likely to make a substantial financial return on my education investment for a long time. I basically made a huge bet on future earnings potential which becomes very risky.
However, given the volatility in the world of work today, education may at least buy an individual some level of improved choice in response to changes in the job market.
wealthy_1
· 1 year ago
I am an advocate of getting at least a bachelor's degree. Unfortunately, most people go into debt for it. Even so, I think of it as an investment. I got a bachelor's degree in English back in the dark ages, then chose to be a stay at home parent for 16 years. That degree was my ticket back into the work force. Granted I didn't have nearly the amount of debt coming out of school as today's graduates do, but without that degree I not have been able to apply for the job I have today.
Steve (Brip Blap)
· 1 year ago
I'm certainly in agreement with any statements about my overgeneralizing and making broad assumptions. It's certainly nowhere near to a perfect model. Like Deepali said, a lot of studies (via Penelope, one of my favorite writers!) indicate that $40K is the breaking point for being able to save, be happy, etc. So if you assumed someone making less than $40K was unable to save effectively, that would change the model.
I'm not sure it comes across clearly, but my takeaway was the same as plonkees and JimB's and everyone else's: get an education early, do it without incurring debt, start saving early. If you do that, you're better off...period. "Paul" does better only because he starts earlier. If Fred doesn't have loans, the model lurches massively back over in his favor. The trick is to start saving very early - and that's really the moral of the story.
All Comments
With the cost of living, I highly doubt that Paul will be able to save 10% of his income. Chances are that he will borrow 10% of his yearly income every five years to keep up with his lifestyle ;-)
I don't think Paul would finish with any close to 1M$ since I hardly know people that are able to save with $9/hour starting salary.
The main reason is because the fixed expenses (such as rent) will be more likely to be the same amount in term of dollar for Fred and Paul but will be a lot more different percentage wise. As an example, a $500 rent a month on a $27,000 year salary is 22% of Fred's before tax income. The same rent on a $18,616 (40hrs @ $8.95) is 32% of Paul's before tax income.
If you add up food, transportation and utility bills (they should be the same for both of them), my bet is that Paul will be left with nothing but debts at the end of the year ;-)
And also I think that it shows that if you go to college you might have more potential to be rich, but potential is nothing if you don't deliver.
@plonkee: Yep, yep, yep. Your statement is 100% true. Wealth and income are two different things - people with low income can be wealthy, and people with high incomes can have a low net worth. It's having the discipline to save SOMETHING that makes all the difference.
Everything is possible, if you are disciplined enough to save and invest early on.
When I graduated from College I was offered $50K + $10 signing bonus my first year. That was very unusually high, whereas my fellow graduates were getting offers $35-$40K at best. BUT, I didn't start investing in my company's 401(K) till a year later. Not because I was not disciplined but because I didn't know anything about 401(k) and investing. Sounds funny for someone who majored in Finance and Investments.
One point you didn't mention is that during their working years, Fred (college dude) would have a much higher standard of living than Paul which has to be worth something.
One other key point (and I know there are 14 million possible scenarios) is that you assume both men save the same amount of after-tax income which is a valid assumption but the fact is that Fred (college dude) has the opportunity to save a much higher percentage of his after-tax income than Paul does which if taken advantage of, might tip things toward Fred.
Mike
I have to disagree completely about who can save a higher percentage of their income! Anyone can save higher or lower percentages of their income - your income level has very little to do with it after you're making enough for rent, etc. Fred might have a lot more income, but if he's got a higher standard of living - like you mentioned - then he probably spends 90% or more of his after-tax income, just like Paul. I know people who make much less than I do who still save as much or more than I do, and I know people who make a LOT more who save almost nothing. Fred has an opportunity, sure, but so does Paul - it's all just relative to the level of comfort you require. I also know people who make as much as I do but live a substantially simpler lifestyle in cheaper locations, and therefore save a lot more.
I could go on and on but I think there's a thought process that says people with low incomes can't save - there's some magic number over which saving gets "easier." There isn't - 99.9999% of the people in North America try to live up to the level of their income. If I could travel back in time to tell 1994 Steve how much he would make now, he would be blown away and figure he could save 50% of his income - but instead, even living a very frugal lifestyle (we save about 25% of our net income) there are a million ways I could cut back further, and don't, because I don't want to face life without Netflix ... for example.
That's a mini-post in the comments. Whew.
Someone who lives alone in a bigger city and makes $18,000 / yr does not have the same opportunity to save as the comparable person who makes $45k/yr. I also don't agree that most people will live up to their salary. Most people I know do raise their standard of living as they make more money but they also raise their savings rate as well.
Mike
Mike
Mrs. Micah: you're right, and the argument can be made that a lot of people "waste" their college years pursuing, say, an art history degree only to get a job in banking. I say "waste" because, of course, that's all part of the journey that got you from point A to B and therefore it's never really a waste :)
If you spent 4 years at college and accumulated debt, then you need to save a lot more than 10% of your salary to maintain the constant (but slightly lower) level of expenditure throughout your life and into retirement.
While your Fred is unfortunately realistic, your Paul is unfortunately not.
And something got missed. It's not always about where you end up, but also about how you got there and what you did along the way. College is expensive, but there are intangibles that are priceless, like experience and opportunity.
All that being said, I agree with your conclusions, and would add another - if you do choose the more expensive school, be both frugal and creative. There's nothing wrong with working through college to help minimize the loan too.
"I could go on and on but I think there’s a thought process that says people with low incomes can’t save - there’s some magic number over which saving gets “easier.” There isn’t - 99.9999% of the people in North America try to live up to the level of their income."
Actually, there is - it's 40K. I know you read Penelope Trunk too. :)
But sadly you're right, most people aren't really saving that extra income, but trying to spend it as fast as they can.
One take away for me from this model is that if you are going to go to college do it sooner rather than later in life to minimize your oportunity cost.
I went to business school in my early 30's, so I had the opportunity cost of real lost income and lost savings ability at school before getting back into the workforce. I'm not likely to make a substantial financial return on my education investment for a long time. I basically made a huge bet on future earnings potential which becomes very risky.
However, given the volatility in the world of work today, education may at least buy an individual some level of improved choice in response to changes in the job market.
I'm not sure it comes across clearly, but my takeaway was the same as plonkees and JimB's and everyone else's: get an education early, do it without incurring debt, start saving early. If you do that, you're better off...period. "Paul" does better only because he starts earlier. If Fred doesn't have loans, the model lurches massively back over in his favor. The trick is to start saving very early - and that's really the moral of the story.