Imagine you’re a new college graduate interviewing for your first job. You go through the normal process of meeting with recruiters, overinflating (read: lying) your strengths and downplaying (read: lying) your weaknesses. After some time you get the worst question ever: What salary range are you looking for?
What does your twenty-two-year-old self say? Are you looking for the big bucks? Ready to start rolling in the dough to justify you’re hard work in college (Spoiler alert: College isn’t that hard).
Common Answer: “As much as possible,” usually worded in a more politically correct manner.
Wise Answer: “Not very much, please.”
Someone beginning their financial journey with a high income is actually starting with a disadvantage compared to the not-so-high income earners if their goal is to become wealthy.
The Curse of a High Income Too Early
Net 60 Income
What do I mean by “high income?” There are obviously many factors that make high verse low income entirely relative. But for the sake of this discussion I’m only looking at salaries that start at or above “Net 60 Income” for early twenty-year-olds.
So what is Net 60 Income? Well first, it’s something that I made up. But from a technical standpoint, if we take our gross income and subtract from it the student loan debt it took to acquire it, we get our “Net Income.” So a Net 60 Income means that if we take someone’s gross income and subtract their outstanding student loan balance, we get to $60,000 or more.
The reason I like this Net Income approach is that it accounts for a wide range of degrees that may require student loans – undergraduate (shouldn’t require student loans, but you know), graduate, medical school, law school, engineering, etc. – but also allows us to compare across those degrees. For instance, a doctor might come out of residency with a starting salary of $150,000. But if the doctor has $100,000 or more in student loans, she isn’t much different than a sales rep making $50,000 with no student loans.
(Yes, the doctor will have a bigger shovel to clean up his mess with such a high gross income and should be able to build more wealth than someone without such an income in the future, but the point of this article is that is often not the case. Try telling someone with $150,000 income he can’t buy this car, that house and go on those vacations just yet. A false sense of security is just that – false.)
A Blessing or a Curse?
In an ideal world, everyone would benefit with more money. The higher the starting income the better, no ands, ifs or buts about it. But our worlds are less than ideal. It’s too simplistic to say “more is better” because more is not better. More is only better when we’ve earned more; when we’ve learned to do to more with less first.
I recently came to a revelation: A high income in your twenties is, for most people, a curse rather than a blessing.
How could this be? Going from $0 income in college to $60,000, $80,000, $100,000 or whatever it may be in just a few years can mask enormous flaws in money management and how someone views personal finance. The problem (behavior) gets a large band aide (money) that falsely reassures them that they’re doing okay.
This is an unorthodox way of looking at money management, but it’s good to have something that forces us to learn how to manage money. The best teacher is to not have an abundance of money too soon. The greatest gift when starting your financial journey is, ironically, not having very much money because it forces your to manage it wisely. You can’t waste it or use it without a plan.
The beauty is that as you start learning and becoming better at managing money wisely, you’ll also start making more money. As you’re wealth-building behavior increases, so does the money. And when you finally start making “high income” money, whenever that may be, you’ll already have a head start in building wealth.
What They Should Teach In School
First, for all of you who will go into the workforce making a modest amount of money, good! You’ve been given a great gift: A reason to start budgeting, paying off debt, NOT buying new cars, NOT buying new house and all the other things we can’t wait to spend money on. Wealth does not start with money, it starts with our behavior with money. You have a chance to master that first. Once that’s mastered, evidenced by your budgeting, saving and spending skills, the money will come.
Second, for all of you who will get high paying jobs right off the bat, you’re at a terrible disadvantage compared to those who are not as “fortunate.” The money will try its hardest to make you do stupid things – buy too much car or house than you’re ready for, ignore your debts, etc. If you don’t realize the extent of your uphill battle, you’ll easily fall into the traps associated with other broke high income earners. They’re all around us, and you don’t want to be one of them but it’s going to take a lot of effort.
The best scenario? High income AND wise money management. But considering how many people are making terrible financial decisions in their twenties and thirties because they start making more money, I think the best-case scenario of doing both is that of fiction. So, do you want to be wealthy when you grow up? Make sure you don’t start off with too high of an income. Because you have to get good with money before you get good things with money.