Wednesday, June 27, 2007

Building Your Career Early Means More Cash in the Bank

A few days ago I read this post on Blueprint for Financial Prosperity, one of my favorite personal finance blogs. Jim makes the point that while he is young and unfettered, he is willing to trade more of his time for money, by working long hours and building his career. He expects that the balance will shift once he gets married and has kids. Once that happens his time will become more valuable to him.

Point well taken. It is interesting that Jim's argument works from a finance perspective as well, if you take into account the time value of money. A dollar that you earn today, is worth much more than a dollar you will earn in 20 years. For example, a dollar earned today, and invested in a money market account for 20 years at 5% per year, will be worth $2.52 before tax and inflation. That dollar you hope to earn two decades later is still just a dollar.

The point I am trying to make is that when you are younger and your family commitments are limited, not only do you have more time on your hands, but also the money you earn is worth much more over time. That is yet another incentive to aggressively invest in your career and financial security in your early years.

This argument is also closely related to the long term value of one's career. When you are just starting out, your career is a very valuable asset. It is a potential cash stream that you will tap over the following decades. That potential value of your career will gradually be converted into cold hard cash. Your career is like a big bank account - every time you get a pay check, you draw down the value of your career, converting potential income into actual income. As time passes and the potential value of your career gets drawn down, improvements and enhancements to your career are worth less and less. So, Jim's strategy works from that perspective as well. His early efforts to work hard and enhance his career, are worth much more to him than similar efforts he might be making in his later decades.

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