Mo’ Money, Mo’ Problems…and Choices
Lifestyle inflation is a real struggle. Just take Elisa and Javier as examples. Throughout their 20s they made very little money. Elisa mainly did non-profit and humanitarian work both in the US and abroad, while Javier’s been a perpetual student trudging away at medical school, ultimately gaining a Visa to practice medicine in the US. They met in the Dominican Republic, but now live comfortably in a small Southern US city. And their income is about to explode.
Javier just finished his residency, and is poised to make a solid six figures in the coming months. They’ve always been a relatively thrifty couple for their salaries, but if they continue to live off the same amount they do now, their savings rate will jump to to well over 50%.
“I’ve always lived below my means,” Elisa begins, “but throughout my 20s, I probably only saved a total of $20K. When Javier and I moved in together, I was making 75K and he was making 60K as a resident.” This sounds like a lot of money until you hear the next part. “We lived in a studio in the Bronx that his work owned. It wasn’t very safe.” Elisa finished. Javier adds, “And we send money back to my family every month.” Their expenses in that family category are higher than you’d think.
And let’s not forget New York City. A money suck if I’ve ever seen one. Article after article will tell you that not only is NYC among the most expensive places to live on planet earth, but the salaries aren’t in line with the price you pay to live there. Wealth disparities are high and even staples like food are incredibly expensive because of the supply chain. “Let’s build an island city as far away from farms as we can to make it as difficult to ship in fresh foods as possible!” I’m guessing this was not the original intention of its founders; none-the-less that’s how it operates today.
On top of that, housing supply and demand has a clear imbalance. “When we were looking for an apartment, I started conversations with ‘Hi, my name’s Elisa, my credit score is x, I have this much money in the bank, and my salary is x. Stuff I wouldn’t tell a lot of people I had to tell complete strangers over the phone.’” Additionally, it wasn’t easy given their living situation. “A lot of places wouldn’t rent to us because we weren’t married.” says Elisa. I’m shocked. “Isn’t that illegal?” I ask. “Maybe, but you have to have an annual salary 40 times the monthly rent, so I guess they thought if we broke up we wouldn’t qualify anymore or something.” Needless to say, these two lived within their means, but just barely. Now that they’re married and have moved away from the big apple, they have a little more wiggle room.
“Back in January, I put everything we had into mutual funds,” Elisa mentions as a side note to her spending habits. “But then we realized, oh we’re moving and we’ll need to furnish our new place, buy a car, and more. We were suddenly very cash poor.” This issue may have been exacerbated by the way they handle money. In this area of their lives, Elisa’s large and in charge.
“Growing up, I never made a lot of money. In the Dominican Republic you live with your parents for a long time. They gave me everything. I had no idea how much a car cost. And I gave a lot of money to friends and family” because when someone asks, you’re expected to give, explains Javier. For the most part, he’s not the one that manages the money though. “I think I spend more than Javier. I also invest more. Sometimes I make a lot of noise about saving, but my actions aren’t always aligned with that,” Elisa continues.
I’m getting the impression that if left to their own devices Javier would be lost in a sea of money from his new MD salary, crippled by all the spending and investing choices available to him. On his own, he might never make it to FI. Meanwhile, Elisa would twiddle her thumbs with very little to invest or spend. Financially speaking, they work well together. Javier is responsible for Offense – bringing in money, and Elisa is responsible for Defense – making sure it’s saved and invested appropriately. But I can see some danger on the horizon.
“In New York, we lived off about $80K a year, and I think we’d like to continue that. We’ve calculated that with Javier’s new salary, we can do that [live on $80K], and retire in about 12 to 15 years.” I don’t immediately question these assumptions because I’m confident the math is sound. The real number I’m questioning is $80K. I couldn’t imagine spending $80K a year in the American South. Of course, I’m not trying to spend that much, and when you try it becomes much easier.
The story I’ve heard up to this point is about two people perfectly content to live on very small or non-existent salaries throughout their 20s. Then they started making money. They moved from the hospital owned NYC apartment to a pricier (albeit, safer) option. Then they moved to a larger home in the South, with more room for furniture, a car, and a slew of potential expenses. Yet food and consumables are almost certainly cheaper now. Why would they need to live on the same amount in an inexpensive Southern city as they did in NYC?
While I find it unlikely they’ll spend every penny they get (after all, Elisa enjoys investing and is actively striving toward Financial Independence), I bet bumping $80K up to $90K will be an easily justifiable decision when their combined income is $250K. But using the rule of 25, that’s an extra $250K they’ll have to have in the bank before they reach FI, or over another full year of work.
So how does someone who makes very little money and still manage to save $20K in her 20s turn $80K per year into the new normal? Elisa’s not alone. Lifestyle creep is a subtle force. Let’s say you make $1500 a month and invest $500 automatically – which many of the experts will tell you to do. After all, automatic payments make it easier and more likely that you’ll actually save. But next month you make $1600 and the same $500 payment gets automatically invested.
It’s easy to see where I’m going with this. That extra $100 doesn’t disappear, it gets spent since it’s not initially earmarked for investments. And in America, salaries tend to increase slowly while layoffs happen suddenly. Every time we make more money, it is easy to justify an increase in spending. But then when the money flow stops, it’s equally easy to justify a decrease in savings to make up for the shortfall. Even doctors aren’t immune from the perils of making less money.
“I love medicine and I love what I do. But I hate the bureaucracy and the way medicine is practiced in the US. It isn’t healthy for me. I might want to take a fellowship in a few years.” Javier explains the fellowship could ultimately lead to a more lucrative career path in a different branch of medicine, but during the fellowship, he’d be back to a relatively low 5-figure salary, pushing their FI timetable back by about three years.
Overall, I’m likely being a little harsh on these guys. They have salaries and financial strategies leaps and bounds above the competition (the average American). Most importantly, they have a goal and a clear path to reach that goal. There are a lot of what ifs still floating around, but more excitingly, a lot of opportunities. They have an incredible number of options. Given their salaries, they could very quickly become accredited investors, or lower their spending and meet their FI goal 5 or 6 years earlier. They could move to an even cheaper city, or to a more expensive one on his salary alone. He could take a fellowship or not.
It’s true that money doesn’t bring you happiness, but it does provide you with options. And this frugal doctor and his working wife are soon going to have an overwhelming number of options to choose between.
*Javier and Elisa’s names have been omitted for privacy
Nathan is the Chief Financial Advisor at Monte Largo Financial