Should You Invest More if You Plan to Substantially Increase Your Income?

Daniel has a question for you, not our Daniel, a different Daniel. I feel better about it now; Captain Chaos can sit back down. This is an interesting one. He says, “I expect my income to increase more than the average throughout my career. I’m working towards an executive position. Should I think about the savings percentage differently than normal income increases? What do you think, man?”

Okay, that’s a great question. I’ve actually had a conversation with Brian about this a ton because a lot of our financial mutants out there do have these rapidly advancing income trajectories. What I’m making today will likely be significantly less than what I make five years from now, ten years from now, fifteen years from now. So, if I know that my income is going to go up, should I really think about my savings rate? Here’s what I think can be your saving grace in that scenario: if you save 25% of whatever it is that you’re making presently, you’re going to set yourself up for success. As your income increases and you continue to save 25% of that income, you’re likely going to allow yourself to save at the appropriate rate to create an income replacement in retirement that would be satisfactory for the lifestyle you want to live.

Now, this is the thing. People say, “What if I start making a million dollars a year in the last few years right before retirement, but my entire working career I wasn’t making that kind of money, and my lifestyle expands?” It’s that last phrase where you lose it – “and my lifestyle expands.” A dear friend of mine gave me some of the greatest financial wisdom that was really more life wisdom. He said to me, “Think about the life that one day you want to live, think about the standard of living you want to achieve, the house you want to be in, the car you want to drive, all the things you want to do, and work very, very hard to get to that point. But when you get to that point, remember that that was the goal and that was the vision. When you get there, don’t keep moving the goalpost further and further and further out.”

So, even, Daniel, if you are on this income trajectory that’s going to advance and continue, if you can save 25% of the lifestyle that you’re living every single year up until that point and you don’t allow yourself to blow through that lifestyle with those higher incomes, there’s a really good chance you’re going to set yourself up for success. I mean, Brian, you talk about this all the time – not to keep swimming upstream.

Yeah, and I think Daniel, didn’t he say he’s pretty young? He didn’t say, but it sounds like that’s how I took it too. He’s saying, “I’m going for an executive position.” I’m all about blossoming memories and making sure because there’s a fine line between being a financial mutant versus being a miser. But I do think even if you have success early on, 25% is a very strong number; it’s aspirational for most. As we see from prospects and clients all the time, we have very successful people out there listening to our show. I will tell you if you’re really having great success and you can go beyond 25%, being aggressive with your saving and investment can actually be rewarded substantially down the road because you’re maximizing not only the saving but the time and also tamping down the fear that this could all go away tomorrow. A lot of those big incomes at an early age, you’re not too different from a professional athlete in that you’re not guaranteed that that money is going to keep rolling in. A lot of sales…

Yeah, I was on a call last week with a client where they’re negotiating some additional incentives because they know they’ve hit some licks. And, you know, you worry, is this something that will be happening in the future, or is the company going to realize, “Hey, we’re paying out way too much to this sales team. Let’s see if we can minimize that.” That’s always a risk. So being aggressive allows you to own your time sooner because that’s what happens. If you save too much, if you invest too much while still enjoying life – like I said, I’m all about the blossoming memories – you just get more options, you get more choices, you have freedom. You’ve done what you’re supposed to.

I worry on the other side though. If you use your high income and your success to say, “Well, once I do 25% or even if you feel like maybe I can go beyond 25% because your peers are well below 25%, maybe I can kick up my life a little bit, enjoy, I’m only going to be in my 20s once or my 30s.” With my high income, I could focus on this later, and it would probably still be successful. I worry that what people don’t realize if you are making a great income and you haven’t dedicated a high savings rate, what do you do with that money? You probably spend it. Probably spending it. And then, I think people don’t realize how their appetites creep over time. It’s back to Bose’s point of visualizing where you want to be before you have success so that you have perspective when you actually reach success. I see so many people who get to a point of what they would have in the past said, “Oh my goodness, this is something I could not have even imagined,” but their creep of desires because we have an insatiable appetite as humans to keep growing and going beyond. I had a neighbor…

I had somebody, a neighbor who came for dinner last night because his wife’s out of town for weeks dealing with a sick relative. He’s like, “Brian, you should spend more money.” He was straight up. I mean, he was giving it to me. It wasn’t good that my wife was sitting right there while he’s doing this, but he was like, “Because you can.” But I told him, “I am willing to open up the sky for travel and making memories with my family, but I’m not going to go waste money on some of these things that I see some of my peers and neighbors doing because it’s wasteful. I don’t get value out of it.” I said, “You know, all the things he told me he got value out of, his European car and these other things and these fancy things that he was looking at.” I said, “I get no value out of that. It doesn’t make me…” And I think it’s all back to RIT talking about figuring out what makes you happy, and then SP Relentless, you can spend heavily on that. But then cut the other, just because all my neighbors are buying Range Rovers or even looking at the Aston Martin, I don’t even know how you say that, it’s so foreign. It doesn’t mean that I would get the same value that some other neighbor would get out of that. So that’s what I would… that test, I think you have to know what makes you who you are and what you value and what your “why” is. Then, go ahead and start building that dream and maximize it to become the best version of yourself. For more information, check out our free resources.