Is Chasing The Money in the Short-Term Worth the Sacrifice for your Long-Term Ideal Lifestyle?

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This is a featured post by The Financial Library

When it comes to chasing money, most of you may think of Ebenezer Scrooge with his stacking of daily change on his desk. I understand that may be an extreme example but he sure did like his money.

We all know we need money to get by for our basic needs and some additional cash to save for retirement, pay off debt, and have a drink or two, but is it wise to chase money in the short run in order to have the lifestyle you want in the long-run?

This is usually the argument that most Financial Independent, Retire Early (FIRE) people make as they try to make as much money as possible in a 10-15 year time span, invest as much as possible, and then live life on their own terms.

And by their own terms, this doesn’t have to mean sitting on the beach all day. It could be choosing that lower paying job that you have in order to bring more happiness to your life, it could mean paying off your debt so you have more freedom to spend your money on things you enjoy, or actually investing for your retirement. There really is no right answer.

I do think that there is a lot of truth in the above paragraph. Strategically trying to maximize your income, in the short-run, can have substantial benefits long-term.

I will put a huge asterisk on this- as you should NOT make it a long-term habit to focus on making as much money as possible, as you will never be happy regardless of what is going on in the rest of your life.

The point is to create a situation to free yourself from a certain thing holding you back. Maybe you pay off your debt or maybe you have enough saved and invested to move to a different job where you are more fulfilled, or go on an extra vacation per year. You are literally buying your freedom back from society in some way, shape, or form.

Let’s show an example of how this actually can be played out

Let’s say we have John. John graduated from college and got a job that pays $75,000 before taxes. He was able to get a great paying job out of college because he majored in Mechanical Engineering and Computer Science. 20% of his pay goes to our favorite person, Uncle Sam, thus, he is left with $60,000.

We are also going to assume that he is ambitious and gets a 20% raise per year between year 2 and 5 of his career but he cools off and only gets a 5% raise from then on out. We will also assume that he saves and invests 50% of his paycheck and gets an average annual return on his investments of 8%.

After the first 5 year period, he will be worth over a quarter of a million dollars! That is far more than many even have in retirement! And 20 years, he will be worth just under $3.2 million!

But what happens if we change the scenario a little bit? What if he starts with the same expenses and same starting salary but only gets a 2% raise? John ends up with around half of his net worth in the previous example with it now being about $1.587 million after 20 years.

But you know what, let’s take it a bit more extreme! What if John only invests 10% of his income? (10% is usually what you hear to do). John ends up with only a little over $315,000 after 20 year which just under 10% of the first example!

In the first scenario, you can essentially create the life you want to live once you hit the golden 4% safe withdrawal rate that most people strive for.

Basically, once your investments are at the point where withdrawing 4% of your investments equals your expenses, after taxes, you can theoretically have enough money forever.

And this ability will give YOU the freedom to live life on your terms!