Jimmy Wales' advice to young generation

"I think one of the most important pieces of advice I can give young people is that you should try to arrange your life in such a fashion that you minimize your consumption expenses as much as is practical so that you take on as little debt as possible.


Why?


If you want to do something interesting with your life, you will need a certain degree of financial independence, by which I mean, the ability to make choices without thinking about the immediate money involved.
Let's say you start your first job and immediately make various spending choices to spend all or most of your paycheck, going into debt to do it.  A popular way to do this is to buy a car and rent a nice apartment.  Now, 6 months later when your boss is a jerk and you wish to change jobs, you've got a big problem.
Consumption spending (as opposed to investment spending) is mostly not required by income.  In some cases (need to see clients, etc.) you'll need to have some consumption spending of course (nice clothes for business).  I'm not talking about that - that's a business expense.  Keep it under control of course, but that's not my point.
For those who see things better with numbers attached, consider it this way.  Suppose you want to have enough money to be able to take 1 year off from working, and you want to maintain your lifestyle during that year.  How does adjusting your consumption requirements help with that?  Assume you start with zero savings.  Assume for simplicity that you can find safe investments to match the inflation rate... although that's pretty optimistic!


If you spend 5% less than you earn, then it will take you 20 years to save up one year's salary.  That's never going to work because in 20 years time your life will change completely, you'll probably get married and have children.  And who wants to wait 20 years to take a year off to pursue a dream?
If you spend 50% less than you earn, then it will only take you two years.  Much better.
But look!  There's a mistake in the above reasoning, and this is the thing I want you to notice.  You aren't trying to save up "one years salary" but rather trying to save up "one year's expenses".


So if you spend 5% less than you earn, then it will only take you 19 years to get that year of freedom.  (Because you only need to save 95% of your salary!)
And if you spend 50% less than you earn, then it will only take you 1 year (not 2!) to get that year of freedom, because your expenses are lower.


Reducing your mental expectations of what you need to spend to be happy therefore has two beneficial effects: you end up saving more money, and that saved money ends up lasting longer.


Now for most of the young people who will be reading this, the ultimate goal will not be to accept a reduced lifestyle forever.  But if you really want to hit it big, this technique gives you the time you need to give it a shot."

No comments:

Post a Comment