The amount of money you will earn in your lifetime is fixed — you just don’t know what the number is yet.
This might sound like a painfully deterministic perspective, but its worth keeping in mind when you assess your spending. Human beings are notoriously short-sighted when it comes to making predictions about the future, but these normal blind spots seem exacerbated when it comes to finances. I’ve read a number a personal finance articles about how bad people are at saving for retirement because we’re terrible at making a guess at what our future selves will want, but I have yet to read one that talks about your money in the context of a lifetime bank account with a fixed balance that you are simply withdrawing from every day.
Even though that’s exactly what’s happening.
People often say money is infinite but time is not. They’re wrong.
“You can always earn more money but you can never get more time”, is the perspective that encourages living in the moment and not worrying about petty things like 7 year car loans. But the truth is your money is probably more fixed than you’d like to admit — and you probably won’t get much more than what can be predicted for your current age and level of education. I know none of us want to think of ourselves as statistics, but it doesn’t hurt to use data as a baseline to make judgements about how you’re doing.
If you have a Bachelors degree, you will earn approximately $1.8 million in your lifetime.
That’s it. That’s all you have. And about $360,000 of it will go to income taxes, so don’t think you’re rich now or anything. The number is even more depressing if you split for gender. Men earn, on average, almost $1 million more over their working lifetime than women, I assume because women are more likely to take time away from the workplace, work part-time, or choose lower paying jobs with flexibility in order to be the primary caregiver of children. But for the sake of simplicity, we’ll assume everyone gets $1.8 million, which comes to just shy of $1.5 million after taxes.
And that’s it.
You’re going to burn through this money much faster than you think. So fast you won’t even realize it is happening. Assuming you start burning money at age 20 and die at 80, you’ll have 60 years of spending and consumption. Trust me, you don’t want more — you can’t afford it. Below is a breakdown of what an average person’s lifetime earnings and spending might look like:
Your numbers might be more or less, depending on a myriad of variables. Maybe your first home was more or less expensive, or your education was free or hundreds of thousands of dollars. Maybe you have a spouse that’s splitting many of those major expenses with you. Maybe you’ll never own a car, or maybe you’ll have four children. And maybe you’ll live to 90 years old, I don’t know. Life is long and varied, and the above is not meant to be a prediction OR a guide — merely a template for your to start making some guesses and assumptions about your own financial situation.
Sidenote: for the sake of simplicity, I did not get into the nitty gritty details of home ownership. The average person will actually own 5 homes in their lifetime, and every time they move, will spend approximately 10% of their home’s value on fees, commissions, and moving costs. Many people think that if they manage to sell their home at a profit, that money can be added to the top of their lifetime earnings. However, if you roll it into another house purchase, particularly if you size up, you’re not funnelling that money into your spending, just your net worth. To keep the above example as basic as possible I used one moderately priced house, but you can sub in whatever makes more sense for your own experience.
You will spend over $1 million more than you will earn in your lifetime
That big red seven-figure number probably took your breath away, but it’s not quite as alarming as you think. Don’t get me wrong: going into the red is never a good thing, but in this case a lot of your spending, particularly in retirement, will be subsidized by savings, real estate gains, government pensions, and so on. You might stop earning money at age 65, but if you live until 80, you’ll be spending it much longer.
This is actually a great illustration of why it is so important to save and invest during your working lifetime: if you don’t, you will not be able to afford your life.
You have to start saving, and you have to start right now. You have no other choice. To skip saving and investing is to leave yourself vulnerable to food, shelter, and other basic needs insecurity in the future. That said, we already know many people don’t save enough for retirement, and this is one of the reasons debt loads are increasing amongst seniors.
But that is not your problem yet. You are at the beginning, and in control of your own financial destiny.
One of the best things you can do is change your perspective: start treating every purchase you make as a withdrawal from your $1.5 million dollar balance.
It’s easy to spend impulsively if you think there is always more money to come, that every day you go to work in order to earn more. But this is a self-sabotaging perspective.
It’s a much better mental exercise to pretend that all the money you’ll earn in your lifetime is already there, and going to work every day is just the contingency you need to fulfill in order to access it.
In other words, you’re allowed to spend your $1.5 million if you work for it — but it’s still only $1.5 million, and every time you spend money, that balance gets smaller and smaller. Everything you buy chips away at that total, and some purchases take out big fat chunks of it. Some of these are unavoidable. For example, you have to pay income taxes and buy food. But some of these are not.
You can change how you spend your $1.5 million
You have 100% control over what kind of car you buy, and how many cars you buy. Whether your buy them outright with cash or finance them for years.
You get to decide if you pay off your student loans ahead of schedule, or spend the maximum amount of time in debt.
You choose if you want to lug around a credit card balance costing you 20% interest for years, or if you want to live with in your means and keep that extra almost-$200,000 for something else.
You can reduce your commute, have a small wedding, and buy your clothing and electronics secondhand.
And so on, ad nauseam.
The choices we make with our money are flexible and individual, and that’s how they should stay. But the most important thing is to be aware of how they impact our long-term financial goals — by being aware of just how expensive they are the context of our lifetime earning and spending.
You’re only going to get about $1.5 million to spend, so spend it wisely.