At the start of your career you may have student loans, rent or a mortgage, a car payment, and a bunch of other expenses. You will want to understand the total amount of debt you have and how quickly you can pay it off (within reason). Let’s say you have $350,000 in debt, which includes a mortgage, student loans, and your car loan. You will probably target to pay your mortgage off in 30 years, student loans off in 10 years, and car loan off in 5 years. Instead of breaking it down to the granular level and getting very complex, I am going to work at a high level.
Let’s say you want to pay off all of the $350,000 worth of loans within 20 years. Each year you will need to contribute $17,500 towards principal alone. This does not include interest or any other fees you may have to pay. You will also need to account for other expenses such as utilities, food, transportation, and maybe even entertainment. So challenge #1 is going to be paying $17,500 per year towards your principal consistently. The way to do this is by building it into your budget from the start.
Challenge #2 is the rising cost of living, which is also known as inflation. It is the general rise in price year over year. It means the cost of services, fuel, and goods are increasing every year. After reading an article called, What are some of the factors that contribute to a rise in inflation by Dr. Econ, I’ve learned there are two types of inflation. Demand-pull inflation occurs when aggregate demand for goods and services in an economy rises more rapidly than an economy’s productive capacity. Cost-push inflation occurs when prices of production process inputs increase. Fortunately, for this exercise we do not need to fully understand the mechanism of inflation. For this exercise, we only need to know the effect and not so much the cause. If you have curiosity of the specifics, I encourage you to research inflation further.
To cover challenge #1, as I mentioned you need to budget from day 1. It is better to pay more and live tighter from the beginning because you realize you can live with less liquid cash. Tying up your cash in paying off your debt is better than using it to cultivate more debt. The trend typically is, we make less money at a younger age and more money at an older age. When you need the money the most in your earlier years, you will have a lower income. When you do not need money in your older years, you will have a high income. This is a good thing.
To cover challenge #2, you need to make sure your income is increasing and your expenses are decreasing. You can increase your salary by gaining more experience, doing well in your job today, and planning for your future career. You can decrease your expenses by actively tracking your expenses monthly, be willing to change service providers for a lower rate, and continuously hounding your service providers for the best deals possible.
It is a very difficult time with the middle class shrinking. If we want to survive and move into a higher class, we need to make sure we are preparing ourselves the best we can. We need to understand our goals and build a plan to reach them in a timely manner.