Financial Life After Yale: Your Financial Dashboard

Your money path. In my previous Financial Life After Yale posts, you’ve read about financial literacy in general; and about budgeting and money-discipline in particular. My latest post – about money-discipline – provided behavioral tips.

As you put together your day-to-day budget, and then mark out a path to your financial future, surely there will be rough times. Life throws curve balls. Sometimes that can be a source of great joy. Other times? Not-so-much. As years pass, things rarely go according to plan. Money is no exception – even if you’re money-disciplined.

What if a down stock market carves away a big chunk of your investments? Or a family member needs money? Or you lose your job? Or you decide to take a year abroad as a volunteer?

If something makes you fall behind on your path to retirement, what can you do?

Guess what? Each of us actually has a financial dashboard! On it, we can find levers and dials – choices that we can make over the years – that change our money picture and can help us catch up.

In this post, let’s tour part of your financial dashboard (and then get ready to navigate your unexpected path to retirement!):

  • How much you earn
  • How soon you choose to start saving
  • How much (of your earnings) you choose to save
  • How you choose to invest (risk tolerance; asset allocation)
  • How you choose to live
  • When you choose to retire.

In your money-planning math, each of these dials and levels represents one or more variables that can dramatically affect what you’re left with at retirement. In this post, let’s explore the first three of these dials/levers.

How much you earn. Year-by-year, this may not seem like something that you can control…but it is. Even now, decades into my career, this choice faces me. Leaving the investment banking and accounting worlds a few years ago for Yale, it was logical to think that my clients would fade away. But they haven’t. Every year, a few clients who still come to me and seek advice. When this happens, there are questions to ask: Can this be done without interfering with my Yale obligations? Is this something that fits my skill-set? Will this be meaningful? And (of course) does the money justify sacrificing family/leisure time (or of sleep)?

Early-on in your career, you may feel that you lack those choices. But you don’t. Your earnings choices may differ from mine; the fundamental questions that you confront are the same.

Early-on, you do have choices that I lack. For example, you can contemplate one or more additional, serial careers (at my stage of life, that’s less likely). Also, you may eventually work at a place where you can choose between 50-80 hour weeks as you rise up the ladder, or a quasi-part-time work routine (Yale has given me permission to work ten months annually rather than twelve, for example). And in today’s gig economy, freelancing offers continuing time-vs-money choices.

When you start saving. Early in our careers, most of us will struggle to save large portions of what we earn. Many of us choose careers in which it’s hard or impossible to start saving until we’re in our 30s. But the math is inexorable and unavoidable. The longer you can put your savings to work, the better. Here’s a simplified example. Assume that (i) you plan to work 45 years before retiring; and (ii) during the first five of those years, you manage to save a cumulative $20,000; and (iii) you decide to invest these savings in an index fund that tracks a major US stock market index; and (iv) over time, major stock indices continue to beat inflation by 7% (as they often have over long periods of time in the past). If  all these assumptions were to hold (they won’t), so that (with a few nausea-inducing bumps) your savings remain hard at work for 40 years, growing in real purchasing power at an annual rate of 7%, your savings would grow from $20,000 to $20,000 x (1.07 ^ 40) ….. to roughly $300,000 in today’s purchasing power! If you were aiming for (say) $1,000,000 by the time you retired, just these early savings ($20,000) would – in this scenario — have gotten you 30% of the way to your goal!

Want to take a more-complete look at the possibilities? Oodles of online calculators beckon. For example you could try savings-related calculators provided by our Yale MasterCard partner – First National Bank of Omaha:

How much of your earnings you choose to save. It’s great to establish an earnings track record, and to start saving early. But how much to save?

A commonly-discussed longer-term goal would be to save –for retirement — between 10% and 15% of what you earn. A few comments about this.

First, these percentages are meant to track your gross pay, not your take-home pay. Second, there will be many years (especially early in your career) when saving such a large percentage of your earnings may seem impossible. Don’t let this get in the way: goals like this (10%-15%) apply to the longer term. For example, perhaps you should think it terms of how much you save during rolling 5-year time periods.

How does this relate to your financial dashboard?

If you find yourself falling behind on your financial path to retirement, and if a substantial portion of your annual spending is discretionary (e.g., gifts, vacations, eating out), you can bump your savings percentage upward (e.g., from 10-15% to 15-20%). This will take discipline, but it plays a crucial role in helping you catch up.

In my next post, we’ll take a look at the rest of your financial dashboard:

  • How you choose to invest (risk tolerance; asset allocation)
  • How you choose to live
  • When you choose to retire.

Keep your eyes on the road!