unsolicited economic advice from Jenisfamous
The post below (asking the question "How many hours per month do you have to work to pay your rent?") has generated a healthy discussion in the comments. I happen to know the commenter who answered "14" (most other answers are in the forties and fifties), and know that he commands a high hourly rate for his services, which leads me to a new topic:
I am convinced that most of what we consider sound financial values about budgeting and saving are illogical Depression-era holdovers.
In our brave new world in which jobs are ephemeral and we are advised to "be your own brand", it is -- for able people -- a better use of resources to worry about maximizing income, rather than minimizing expenses, as income is far more fluid than expenses. (It is easier for me to find a way to make twice as much money than it is for me to find a grocery store that charges half-price). This was not true for salarymen in, say, 1935.
Put another way, in an average American city/suburb (I'll work off my knowledge of Virginia Beach five years ago), rents (excluding public housing and a few crazy luxury apartments) range from about $500 to $1200. Hourly wages range from $5.15 per hour for minimum wage workers to about $300 per hour for top attorneys. Let's do the math: the top rent is 240% of the bottom rent. The top wage is 5,825% of the bottom wage. Wages clearly have a lot more wiggle room.
If you are an old lady on Social Security (with no wiggle room at all), clipping coupons may be a good use of your time. But who wants to live like an old lady on Social Security? If you are twenty-five and college-educated, I'm not sure that making a budget and carefully living within it is the optimal use of your mojo ("mojo" here meaning time, money, motivation, and ingenuity), unless you are mired in irresponsibly-acquired credit card debt and need remedial financial help.
If you are twenty-five and college-educated, I think your mojo is better expended developing a skill that can be offered on a freelance basis in addition to your 9-to-5 job (and which will provide a backup plan in times of unemployment), or obtaining additional training or participating in networking opportunities such as to accelerate advancement and allow greater job portability in the 9-to-5 job world.
I know how compound interest works, of course, but I think that before an able 25-year-old dumps money into a retirement fund, he should think: is there something I can do with this money that will contribute to making me the kind of person whom others will pay twice as much as I make now? That might be something as simple as taking a class to learn a new skill, and it might be something as un-obvious as flying halfway around the world to meet a mentor in your field. But I think, at 25, that's a sound investment.
Why on earth didn't I major in economics? I could do this all day.
I am convinced that most of what we consider sound financial values about budgeting and saving are illogical Depression-era holdovers.
In our brave new world in which jobs are ephemeral and we are advised to "be your own brand", it is -- for able people -- a better use of resources to worry about maximizing income, rather than minimizing expenses, as income is far more fluid than expenses. (It is easier for me to find a way to make twice as much money than it is for me to find a grocery store that charges half-price). This was not true for salarymen in, say, 1935.
Put another way, in an average American city/suburb (I'll work off my knowledge of Virginia Beach five years ago), rents (excluding public housing and a few crazy luxury apartments) range from about $500 to $1200. Hourly wages range from $5.15 per hour for minimum wage workers to about $300 per hour for top attorneys. Let's do the math: the top rent is 240% of the bottom rent. The top wage is 5,825% of the bottom wage. Wages clearly have a lot more wiggle room.
If you are an old lady on Social Security (with no wiggle room at all), clipping coupons may be a good use of your time. But who wants to live like an old lady on Social Security? If you are twenty-five and college-educated, I'm not sure that making a budget and carefully living within it is the optimal use of your mojo ("mojo" here meaning time, money, motivation, and ingenuity), unless you are mired in irresponsibly-acquired credit card debt and need remedial financial help.
If you are twenty-five and college-educated, I think your mojo is better expended developing a skill that can be offered on a freelance basis in addition to your 9-to-5 job (and which will provide a backup plan in times of unemployment), or obtaining additional training or participating in networking opportunities such as to accelerate advancement and allow greater job portability in the 9-to-5 job world.
I know how compound interest works, of course, but I think that before an able 25-year-old dumps money into a retirement fund, he should think: is there something I can do with this money that will contribute to making me the kind of person whom others will pay twice as much as I make now? That might be something as simple as taking a class to learn a new skill, and it might be something as un-obvious as flying halfway around the world to meet a mentor in your field. But I think, at 25, that's a sound investment.
Why on earth didn't I major in economics? I could do this all day.
Labels: economics
posted by JenIsFamous at 5/29/2007 08:32:00 AM
4 Comments:
You make a very good point Jen. Given inflationary influences on money it makes little sense to keep any of it for longer than is absolutely necessary to spend it. If you put a dollar in your pocket on the first of the month it is worth less at the end of the month. Whereas if you spent it on a lovely piece of cheese (for example) at the beginning of the month and then threw a bring your own bottle wine a cheese party you'd at least have some wine. This is how banks work after all. They don't keep the money you invest in them, they lend it out to acquire a greater return.
In addition most pay increases in the workplace are a percentage of your current salary. If you earn $10/hour and receive a 10% pay rise then you'll be on $11/hour. Earn $20/hour and the actual increase is twice that of the poorer paid employee. This is why negotiating your starting salary in any job is so important. Even additional benefits like a dental plan or employer contributing pension scheme should be dropped in favour of an increased starting pay. They can always be added at a later date or you can use your extra money to buy your own insurance policies.
This does not apply to training though. Anything that can improve your skill set will improve your employability. Even eclectic skills that have little to do with your chosen career have value in the interview process.
Thanks for this Jen, I now have an excellent reason to buy some cheese rather than save my money.
It's probably worth noting that by the time you're 25 and angling towards a career, your potential income is severely constrained. Instead of $5.15-300 an hour, it'll settle more down to 15-20, 60-80, etc. depending on your path. Unless you're down for completely rejiggering your life (career change, a stint at professional school, etc.), getting over the upper hump is not really doable.
That, and there are a huge number of skills that aren't freelanceable. Can I freelance being a whizbang HR person? How about molecular biology? Not really.
Alas.
Hey Anonymous!
No, you probably can't be a whizbang freelance HR person (although you could certainly be a freelance headhunter).
However, a person in such a position might consider spending money attending conferences that his job won't pay for, or taking mentor-types out to lunch. Same for a molecular biologist.
And either such person might make a point of consistently developing a hobby that is more or less unrelated to his career (personal training, muffin baking, dog grooming, carpentry, teaching a language), just in case his entire industry is outsourced or something catastrophic happens in his own career (i.e., he is falsely accused of sexual harassment and becomes unemployable as an HR person; thus, he immediately advertises for poodles to groom while working on getting a lawyer).
Of course, none of these things are *necessary*, but I think they might be a better use of resources than making a monthly budget and then fastidiously making sure you don't spend more than $75 per month eating out, even when you might prefer an appetizer now and then.
I also don't suggest re-using your bread bags, although many a little old lady has been known to do just that.
Jen
Generally you're going to be better off limiting expenses rather than trying to maximize income. Most millionaires in this country don't actually have huge incomes, they are just better able to keep income greater than expenditures for longer periods of time.
Think about it this way: your income is always, to an extent, out of your control. No matter how highly skilled you are, you are at the whim of your customers. You can get fired at any time in most states (IE, "free employment). You can try to make yourself more attractive to employers, but at the same time becoming more highly paid (especially as a consultant) also makes you more vulnerable to cost-cutting measures (as a great number of people found out during the dot-com bust).
Maximizing income MAY pay dividends but minimizing expenditures ALWAYS pays dividends. It's this same degree of certainty that explains why companies fire employees when they're in trouble rather than raising their own prices.
I am not advocating monastic living, but you can always spend money smarter. Going out to eat at lunch is cheaper than going out to eat for dinner, brown-bagging is cheaper (and healthier) than eating out, etc.
Another thought to keep in mind is that "work" is basically a formula for turning time into money. Ideally of course one wants to increase the hourly rate, but if push comes to shove people will often just work more hours. I often think people are better off working fewer hours and relaxing more. Don't discount laziness - the wheel, after all, wasn't invented by somebody who liked to drag things.
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