It can’t be emphasized enough: Developing your career is still the best and most promising way to secure your financial future.
We all know the mantra that parents, banks and insurance agencies try to feed us: Start saving early and utilize the power of compound interest to your advantage. The sooner you start saving even small amounts, the sooner you will reach your target.
Theoretically, it makes sense and it is probably one (out of many) ways to start your journey. But I am not a big fan of it. Let me explain.
The first time when I opened a mutual fund saving account I was just 20 years old. The bank convinced me at that time that saving 50 EUR a month would make me rich by the time I retire and the numbers seemed to support it:
- 50 EUR x 12 = 600 EUR per year.
- Considering 45 years, that’s a down payment of 27.000 EUR.
- With compounding interest and re-investments of all generated profits at an average market return of 8% a year, this would indeed translate into solid 250.000 EUR when I reach the age of 65.
A lot of money. Only problem: As a student 50 EUR was already a lot of money to me and I wasn’t always able to come up with it. It didn’t take long and after a year I canceled the account as I was forced to make a downpayment for a student apartment and I simply didn’t have enough cash on hand.
Looking at the calculation at that time from today’s point of view, I see things a little differently.
- Saving 600 EUR per year would equal 3.000 EUR after 5 years and with a friendly market return of 8%, it would have generated a profit of 801,56 EUR. My account would, therefore, have a value of 3.801,56 EUR.
Here is the catch: As an employee in a managerial role, I could probably save up the same amount every 1 or 2 months.
So instead of living as a student on the brink of extinction for 5 years, it makes so much more sense to me to try to push up my career the best I can and to get to a salary level that will make up for those 5 years in as little as a month. Is it possible? Absolutely and in fact, I did just that, and it worked. In my first 3 years as a manager, I saved and invested more than I would be able to collect in 22 years of my original investment plan with the 50 EUR a month mutual fund.
I admit, not everyone can do this and the stock market has been very friendly for a long time. Also having a solid, permanent income is only one side of the coin. Another important point that has an effect on our ability to save and invest is the lifestyle we chose. I prefer a minimalistic lifestyle and buy only things that I truly need. During this 3 years, I traveled around in Asia as a hotel manager and all my possessions were in a carry-on with 7kg of weight. This increased to 12 kg after some time, but despite having a family now (which requires some adjustments to my strategy and consideration for my family’s needs), I am trying to stick to the same basic idea that allowed me to pursue my target of financial independence in the first place: Appreciation for simple life and maintaining a low cost of living.
Having a solid income and keeping your living expenses low is the perfect formula to ensure that you become financially independent in a much shorter period of time.
Don’t punish yourself when you are young, but don’t get lazy as you get older. Work on your career, try to increase your income and remain humble with spending. There is no reason to wait until 65 to be able to follow your dreams. Doing the right things at the right time, chances are that you can reach your target much earlier.