Saving in your 20s

What’s the most reliable way to identify an amateur at a poker table?  I’ll give you a hint, it’s not the guy making mistakes.  It’s the one who gets loudly angry at him for making mistakes, when he loses in an unlikely fashion he just can’t stand to keep his mouth shut and just has to explain at length why he shouldn’t have lost and why the other guy made such a big mistake.  In poker, you want your opponents to make mistakes, why would you explain what they did wrong? The reason is that the amateur’s sense of self-worth is wrapped up in winning each hand.  If he* loses, to soothe his ego he has to explain why he made the “right” decision and the other person made the “wrong” decision.   He* has traded his ego for future profits.  I hope that I’m not showing off my amatuerishness doing precisely the same thing here.

I read this (If You Have Savings In Your 20s, Something’s Wrong) article.  Please take a moment and read it, or at least the opening few paragraphs.  I suppose if the author, Lauren Martin, decides to use all of her savings eating out, buying clothes and going out at night, all the better for me.  The dollars she spends wind up (in a very small part) going into my pocket.  In a sense this is a perfectly fair transaction.  She works at a magazine which earns money in part by selling advertisements for companies I own (like t-mobile), through a broker (looks like google ad services) that I own, then spends that money at businesses that I own.  I’d be willing to bet that she hasn’t gone a day without somehow giving a little bit of money.  How do I achieve this feat? Well, I contribute to a 401(K) type plan (here’s what she had to say about those):

When you care about your 401k, your life is just “k”

When you’re 40, you’re not going to look back on your 20s and be grateful for the few thousand you saved. You’re going to be full of regret.

You’ll regret the experiences you didn’t take, the people you didn’t meet and the fun you didn’t have because you were too worried about a future that came and went.

I’m not quite sure what kind of world it would be if the difference between me saving 10% of my income and saving 0% of my income caused me to miss out on a lot of experiences, people, and fun.  Honestly, I find that the first dollar I earn is really important to me, the second dollar is less so, but the last dollar I earn?  It isn’t critical to my happiness, people may find it hard to believe, but I don’t miss my 401k savings.

Now I’m inclined to think this is all okay.  I don’t need to consume everything I earn right now to be happy, evidently this girl does.  We’ve found an agreeable arrangement where I provide my capital to businesses which are required to keep Lauren happy.  In return I get to earn a profit on that capital.  Fair deal, right?

The problem

They want us to save because it provides us with a safety net, but that’s exactly why we shouldn’t. Their need for us to have a safety net is just a giant metaphor for the difference between our parent’s generation and ours.

The only problem that I have with this is that I don’t honestly believe that Lauren has thought this all the way through.  She seems to think that money represents safety. It can.  If you have a nest egg you are more capable of dealing with problems as they come, but that’s not the real reason.  You buy insurance for safety.  If you lose your job, that’s what unemployment insurance is for. If you get sick, that’s what health insurance is for.  If you become disabled, disability insurance.  If you die, life insurance.  These are important things to have, and you often need a little savings to supplement them.  However, it is not the reason that we save.

The Real Reason to Save

Freedom is the real reason.  Savings give you options.  Options that folks that won’t save don’t have.  A little savings gives you a few options.  If you save up six months of expenses that’s six months of your life that you can do anything you want with. I had a close friend that also has the savings bug.  I’ve not seen her deprive herself of the company of friends or eating out in my memory.  Nevertheless she managed to save some money.  Last year she quit her job to go study a language in Europe for six weeks.  According to her it was an irreplaceable experience.  Someone who spends every last dime doesn’t have that kind of flexibility in their lives.

What if you save more money?

Six months of expenses is enough to allow you to quit your job and not worry.  You’ve got plenty of time to find another one. What if you save more though?  The 4% rule is a common rule in early retirement the basic idea is that if you only spending 4% of your invested capital annually you will probably never run out of money.  You could spend the same amount (adjusted for inflation) every year and more likely than not end up with more money by the day you die.  That means to quit your job (permanently) you just need to save up 25 times this year’s expenses.  (Granted that’s a massive amount).  It also means that if you save up 6 years of expenses, you would only need to cover nine months worth of expenses out of a year.  You could take a 3-month sabbatical to somewhere new every year, forever.  If you save up 12 years of expenses, that’s only half the year you need to work.  The profits from all the 20-somethings in the world spending their every last dime “enjoying life” really add up, don’t they?

Right Plan, Wrong Execution

I couldn’t enjoy my life because I was too busy worrying about my bank statement. I was too busy watching my savings instead of savoring my youth.

Lauren really hits the right sentiment here.  This is a personal finance blog. We think about bank statements here, but we think about them so that we don’t have to worry about them.  Savoring life is deeply important.  Fortunately, it’s possible, even advisable, to do that with less money.  Ultimately, I think the approach of Thoreau (28 when he went to Walden) rings truer to me than Lauren’s.  He said:

I went to the woods because I wished to live deliberately, to front only the essential facts of life, and see if I could not learn what it had to teach, and not, when I came to die, discover that I had not lived.

Thoreau kept a very careful account of all the money he spent over the two years at Walden pond, it works out to roughly $870 in today’s dollars, I guess he didn’t need to spend money to enjoy life. My suspicion is that he had the more memorable time.

 

* Yes, I know I’m using the male pronoun here.  There is a simple reason.  I’ve never once in my life seen a female poker player behave this stupidly.  Perhaps I’m being sexist.  If someone can provide me an example of one woman they’ve ever seen do this I’d be happy to edit into the he/she construction.