Millennial Money is a weekly submission-based series that provides financial advice to millennials. Read the full series here.
At 26 years old, Jen knows she’s making “a lot” of money.
“Currently, I work in finance in the United States, but I’m originally from Toronto,” said Jen, who started the job just half a year ago earning $ 375,000 a year.
But despite the high income, she wants to quickly save enough so she can focus on her main goal: writing.
“My goal is to build enough of an asset base so that I can focus full-time on writing as soon as I’m able to afford it,” she said, noting she joined the finance industry as a stepping stone to doing her own thing.
“I entered finance in hopes of saving enough to take a shot at freelance writing for a few years, unconstrained by financial concerns,” she said. “It’s not a trivial set of compromises, of course, as the road here is long, and the hours are obviously exceptionally demanding.”
Growing up in a middle-class family, Jen knows that she’s lucky to have been afforded this.
“My parents couldn’t have afforded the kind of education I was lucky enough to have. Grad school, university and private school were fully funded via a series of scholarships. So there was no debt to pay off,” she said. “I worked hard, of course, but was also tremendously lucky throughout my life.”
Now, she’s hoping to save enough to move on. “I’m unique among my colleagues in that I expect my income to radically decrease over time, potentially as soon as a year or two from now,” she adds.
On a typical day, Jen works from home and very rarely cooks. “I’ll usually Uber Eats for lunch, and then get dinner with a friend or pop out quickly to get takeout,” she said.
On the weekends she’ll hang out with her friends, grabbing brunch or hitting up a patio for dinner. “Most of the time these are restaurants with mid-range prices, though two to three times a month, I’ll have a splurge-y dinner,” she said.
With her high-paying job, she’s also thinking about starting her own company and becoming her own boss. So far, her savings are looking pretty good.
“I currently have $ 270,000 in savings, in an all-equity portfolio, with a bit of crypto on the side,” she said.
Her question to our financial adviser: when can she quit her job?
The expert: Jason Heath, managing director at Objective Financial Partners Inc., on Jen’s finances.
I always tell people one of the biggest benefits of spending well below your means is that it buys you opportunity. In Jen’s case, it is the opportunity to pivot out of finance into something else that may make her happier. Money can buy you stuff, but the fulfilment from material purchases can be fleeting.
Starting a business is not easy. The good thing about writing or consulting businesses is that the start-up costs are lower. You do not have to sink as much into bricks and mortar or inventory like a retail or hospitality business.
If Jen is going to take some time off work or start to build a business, I would start to accumulate some of her monthly savings or even convert some of her existing savings into a cash savings account. She is 100 per cent in stocks and cryptocurrency right now, which may be more suitable for a long-term savings goal. She may need to live off her savings for an extended time and if a stock market downturn happened shortly after her income stopped, it could be pretty challenging.
Jen spends $ 1,500 per month on restaurants and takeout. That is almost $ 20,000 per year. That may be in part because of networking for her job or how many hours she works.
She donates $ 2,000 per month to charity or about 10 per cent of her after-tax income. This is really generous and is obviously an area that could be trimmed back if she was not working or earning much.
I note her current burn rate is over $ 10,000 per month, meaning she has about two years of spending saved up right now. That may not last long if she is not working or not earning much income. I think it is important for her to get a sense of whether her lifestyle will change if she is no longer working in finance. I would challenge her to live and spend like she plans to for a period of several months to make sure she has a sense of how much runway she has with her savings before quitting her job.
Jen lives in the U.S. and if she plans to stay there, assuming she is allowed to based upon her visa or immigration status, she should consider her health-care coverage. She likely has good coverage at work that will need to be replaced if she leaves and is unemployed or self-employed.
Young people underestimate the risk of a health issue or disability, but Canadian residents are generally well protected from medical care costs. Not so in the U.S., where health insurance can be $ 500 or more per month depending on coverage and state of residency, and where a medical emergency without health insurance can be devastating.
Disability insurance replaces your income if you become disabled and cannot work, but this can be difficult to get when you are self-employed without a proven income history. Critical illness insurance may provide a degree of income protection for Jen if she leaves her job, providing a lump-sum payment in the event she develops a critical illness.
Results: She spent more! Spending in week 1: $ 876 Spending in week 2: $ 1,500
How she thinks she did: “I spent more this week, but primarily on one-off purchases like travel and cooking,” Jen said.
This week, she also tried to buy groceries and cook more, but realized how much she relies on takeout.
“Cooking takes a lot of time, it’s usually not very efficient. My kitchen is also poorly stocked (since I do so little cooking), so there’s lots of startup costs (i.e. oils, seasonings, etc.),” she said.
Take-aways: Having only been at her job for half a year, Jen will take the adviser’s tips on staying patient to watch her spending patterns.
“Definitely think monthly burn would substantially decrease once I leave finance,” she said. “It’s a good point that I should try and scale back for a few months to understand what my consumption patterns will look like.”
What she also realizes is that a lot of her big costs are because she works long hours and has no time to cook or commute.
“I expect that these could be substantially reduced once I’m no longer in this industry.”
Finally, something Jen hadn’t thought about was her health.
“The health-care point is a good one. I will definitely try to come back to Canada once I leave this industry. In fact, the visa will likely ensure that I do,” she said. “The earning potential isn’t as high, but the protection ( health care, welfare state) is obviously much more accommodative.”