By: Dividend Sensei
Well this brought to mind another story I heard back in Army medical school. A doctor who had gone to a civilian school, (and finished with about $200,000 in debt), told us about he always advised his friends to “live like a resident for years after you become an attending”. In other words in college and later your first job, you make very little money. That’s what you get used to, and you learn to, hopefully, be happy under such circumstances. This doctor was saying that you can take that same mindset and choose to forgo spending all of the increased pay you get as you climb your profession’s corporate ladder. This man made sure that 50% of any pay bumps, (which are usually permanent), went straight into his 401K. Or they did after he was done paying off this student loans.
That’s a strategy that I wholeheartedly endorse. After all if you’re happy living on $3K per month and suddenly get a $1K per month raise, then would you be any less happy if you saved $500 of that to build a strong financial future? Pay down your debts, build an emergency fund, (so you can sleep at night), and then get to work building your retirement nest egg. In other words because humans become accustomed to what we already have, our levels of happiness from more stuff, (or income), doesn’t rise nearly as quickly.
In economics that’s called “the law of diminishing returns”. This means that each extra dollar you earn, (and spend), tends to make you less happy than the last. In 2011 a famous study found that income correlated directly with rising income up to about $75,000. Beyond that extra happiness decreased until it basically peaked at about $150,000 and then started to fall. That makes sense because any job that pays more than $150,000 is likely to require a lot of time and responsibility. Or to put it another way if you are making $1 million per year but killing yourself putting in 80 hour weeks and never have any time to enjoy it, then you’ll be less happy than someone earning just $75,000 who has a less stressful 40 hour per week job and lots of free time. A different study calculated the peak happiness income for 13 countries other than the US and found the average was $161,000.
Which brings me to a very personal example of putting this principle of “save your raises” to work. When medical disability forced me to give up my dream of becoming an Army trauma surgeon I was crushed. I had lost my mission in life, and my calling. I had invested my entire self worth into that goal, and now it was gone. Worse still? With that job went my $60K income, replaced by a $20,000 annual disability pension.
My wife (now ex-wife) moved to Alabama to be near her familym (we had just lost three children), and I spent years bouncing between jobs. My wife and her family convinced me that in the South, “the wife handles the money”, and foolishly I tried to fit in and let her do just that. That proved to be a disaster because my wife did not believe in frugality at all. In fact her and her family’s philosophy was that money was for spending because you could be hit by a bus tomorrow. In fact they not just spent every penny that came in, but loaded up on debt as well because “I’m worth it”. There was also a lot of “keeping up with the Jones” involved. Things like going on group shopping trips and flamboyantly decorating our home with very much unneeded accessories and new furniture.
The point is that we lived broke, in debt, and in constant fear of running out of cash. Things got so bad at one point that we had our power, water, and internet shut off. At one point I literally went a month without eating (food stamps were an embarrassing “no no”). I subsisted off mustard, pickle water, and my own body fat. I ended up losing about 100 lbs during this long slog through financial hell. I learned to cherish: any and all food, electricity, the internet, (which became my livelihood as a writer), and most of all air conditioning.