Ep.21 - What Defines Financial Security
HIGHER INCOME ≠ MORE FINANCIALLY SECURE
I can testify to this myself. When I made more money year over year, it was never enough to help me feel more financially secure, because first of all, Uncle Sam takes 1/3 of it; and secondly the actual amount that came in was always short of the money that went out for things in life. Yep. Damn things.
Just to name a few in my personal life, some of the big-ticket things included a wedding, undergraduate student loans, a car loan, parent support, sibling support, down payment on a house, and now more graduate school loans. I never truly felt financially secure until 2016.
In your friend circle, you probably know at least one person who makes a lot of money, at least in your eyes. Maybe a doctor, a lawyer, or a newly minted MBA graduate? However, making that six-figure salary does not mean that person is financially secure. Why? Because there's a cost for them to get there: student loans. Most of them are probably drowning in debt.
MY RULE FOR TESTING IF YOU ARE FINANCIALLY SECURE
My way of defining if anyone is financially secure is very simple:
“If you stop working now, do you have enough cash to maintain your current lifestyle for the next 6 months?”
By the way, if you live with your parents, you definitely do not pass this test.
HOW MUCH DOES IT COST TO MAINTAIN YOUR CURRENT LIFESTYLE?
Without being super specific, you can tally up 90% of your monthly living expenses by adding up the following two components:
Monthly Living Expenses = rent + gasoline + auto insurance + utilities + groceries + fun stuff (eating out, concerts, etc.)
+
Monthly Debt Servicing = student debt + car payment + credit car payment
ONE OF THESE FOUR PROFILES PROBABLY MATCHES YOU PRETTY CLOSELY
Profile #1 - Recent College Graduate With a Good Tech Job (#Young&Free)
Young&free makes good money for a 24 year-old in LA. She only spends $1,800 a month, with rent of $1,100 for a room in a two-bedroom apartment.
She is a typical new grad. She has student debt and she enjoys going to concerts and traveling.
As a result of a limited amount of working years, she only has $10k in savings, and has 4.2 months of savings to maintain her lifestyle. So she fails the test.
Profile #2 - Two Average-Income (e.g. teAchers) Couple (#Young&Hitched)
Young&Hitched are two 29 year-olds, who are both teachers in LA. They spend $2,500 a month, with rent of $2,000 for an updated one-bedroom apartment. They still have student debt.
Because they are older and they have worked for 8 years each, they now have $30k saved.
Since they have worked more years, and they don't live an expensive lifestyle, they easily pass the test.
Profile #3 - A Doctor & A Writer (#HustleCouple)
The hustle couple are in their 30s, with one being a newly minted doctor and another being a writer. They pull in $160k a year.
They bought a modest home at $600k, with mortgage being $3,500. But the doctor has $160k of student debt in total, and pays $2,500 a month towards it for the next 10 years. In addition, they also bought a 1-year old Toyota RAV4, with a payment of $500/month.
Even though they make a lot of money, they are very stretched because of their mortgage and student debt.
This illustrates that just making more money does not mean you are more financially secure.
Profile #4 - A High School Science Teacher in His 30s (#Lonewolf)
Lonewolf is 32, single and makes $70k as a high school science teacher.
He's worked for a decade and has completely paid off his car and student debt. He lives in a comfortable one-bed for $1,500. In a decade, he has slowly amassed $60k in savings.
Although he does not make 6-figures, he has done a great job of paying off his debt and saved consistently. If he loses his job tomorrow, he can easily get by for another 2 and half years.
I hope you enjoyed this article. Follow me on Instagram: dollars_and_sense_la.