A Tale of Two Choices

May 25, 2012

Over the last few weeks, I have met a couple of young men who are in the early stages of their career.  Both are in their mid-20’s and both make approximately the same amount of money, yet each had very different financial issues to discuss.  The contrast with these two gentlemen is something that I am absolutely going to point out to my kids and hope that they can take a valuable life lesson from it.

The first guy came in to talk about how best to allocate his 401(k) investments and what to do with the amount of money that he can save outside of his retirement plan.  He wants to ramp up a significant emergency fund and save for the down payment on his first home.  He is living with a friend from college in a modest apartment. He still drives the same car that he had in college and when that dies he plans to buy a used Honda Accord or Toyota Camry or something similar.  He is contributing 15% of his income to his 401(k) and his decision to aggressively save helped him decide how much he could spend on his other expenses.  He plans to increase his contribution by 2-3%/year until he reaches the maximum allowable by law, $17,000 per year.

The second guy was about as different from the first guy as possible.  He didn’t like his college car (a used Accord) so when he got a job and had a stable income source, the first thing he did was buy a 3-year old BMW convertible.  His car payment is over $500/month now.  He wanted to be completely independent, so he is living by himself in a very nice apartment.  For rent, he is paying 3 times what the first guy is paying.  Because of the magnitude of his car payment and rent, he has not even started to contribute to his 401(k) and he has virtually no savings in the event of an emergency.

Within a few days of each other, I met these two guys.  Both are smart, hard working, very professional young men that I’m certain will have very successful long careers.  By all indications, these are two great guys.  But where will they be in 20-30 years when, if their lives mirror my college friends’ lives, they are married with kids approaching college age?

Just based on some quick calculations that we prepared, the first guy has a plan to have a house with no mortgage (he plans to save for a 20% down payment and buy a modest house that he intends to pay off in 15 years) and $1,000,000 in his 401(k) by age 50.  Those are 2 important life goals for him.

The second guy hopes that one day he might be able to get to the 6% 401(k) contribution level in his 401(k) and figures that he will not even think about buying a house until he gets married.  And, he laughed and said that will probably be a long time away because he is having too much fun living his lifestyle now and doesn’t want to cut back on anything today as he is making the memories now that will get him through the rest of his life.

Clearly, there is a line that divides these two.  Is the first guy sacrificing fun and memories today in order to prepare for a future in a very uncertain economic climate?  Is the second guy getting himself so far behind the curve financially now that he will have no choice but to work until he’s 70?  What role does lifestyle choice have in determining your long term success?  Is either guy right?  Is either guy wrong?  What are the risks associated with each guy’s situation?  What lesson do I want my kids to learn?  Do you see yourself in either of these guys and if so, what changes would you suggest to him (and yourself by extension)?

These questions, and more, will be the subject of next week’s blog.  If you have thoughts you’d like to add, remember the comments section below!