I know I need 8 hours of sleep a night, but didn't know money's best spent during a certain part of my life.
I don’t always listen to podcasts, but I've been on a bit of a tear lately.
I was listening to a terrific podcast episode from Noah Kagan’s show where he was interviewing one of my favourite personal finance guru’s Ramit Sethi. Ramit glosses over a quick quote from his Uncle at around the 29:30 second mark.
He mentions a story where he was told by the Uncle
The window to spend your money in your life is 40 to 75.
This raised my eyebrows.
I hadn’t heard this before. I’ve heard the phrase ‘life begins at 40’, but nothing to do with spending be a window that is open for a certain age in your life.
Yet, being the curious mind that I am – I started thinking about how this statement is making a lot of sense. Our window to spend opens up at age 40 and shuts by 75.
Not many people talk about spending, especially not the windows of peak spending.
We are given messages through life to save and save for a rainy day, a house, children’s education etc. I’ve seen news or tv shows mentioning “save 10%/20% of your paycheck”, but never seen “start spending when you are 40” (or any other age).
For me, I thought that my spending would start to peak when I retire. That made sense as money saved for retirement would be accessible, cost of living would be lower with (hopefully) minimal debts.
Why would spending peak from 40 to 75?
By the time our 40s come we are hitting our straps in our careers and our salaries start to peak (and will peak by your late 40s).
Because of our good, stable incomes we are might also be succumbing to lifestyle creep. Buying nicer things, or more of them – higher quality furniture, better holidays, nicer cars or upgrading the house.
Spending here might be more deliberate and manageable. You’ve spent years working out what you like and saving enough to spend with east. This is in contrast to your 20s and 30s where nothing is consistent – you are going through rapid changes of work, relationships, lifestyle and circumstance.
It’s starting to make more sense, many major life changes happen up until you are 40. Our ability to command a good income gradually rises the older we get. Those savings accounts we may have been adding to over the years are starting to be looking juicy.
And then the end of the window, when we get to 75. By then you’d think we’d have achieve much of what we were wanting to do. Spending here would most likely only need to cover the lifestyle we’ve been building up. Can’t think of too many things that would suddenly spring up on us at that age that need considerable spending on. Even if we did need the cash, there should be enough in savings or assets to cover that.
So thinking now that 40 to 75 is the prime time to be spending, do we avoid spending outside of this age bracket? What if we, as young adults focussed on saving up to our 40s and treated that moment or age as the time to take the lid off the savings accounts and spend how we always imagined we could.
New plan: Save until you turn 40, then turn on the spending tap
Let’s play out a scenario.
Consider that we as 25 year olds pass on spending on the ‘big’ things until we are 40. Let’s loosely classify these as – nice cars, dream homes, luxury holidays, boutique experiences, expensive gifts.
Let’s also consider that you are still living reasonable lives from 25-40 – going on holidays (good but not epic), living well (but within your means) and spending time with family (but not shouting them trips overseas).
Let’s say you are on 50k a year salary at 25. That’s $3434 after tax and save 15% for the long term (with 60% going towards living costs and 15% for short term savings). Let’s round that 15% down from $515 to $500 a month of the $3434.
So $500 a month. Let’s invest that into an index fund that averages 8% over a 20 years period (yes these exist).
By 40 you will have $174k in the bank. Alright.
By saving over those 15 years, by the time you're 40 you will have 3.5 times your salary at your disposal.
What would that extra money mean to you? Remember that you've lived a pretty good life until now, just haven't splurged on luxury or top notch purchases.
- You could by a $700k house (20% down), or $300,000 (with 50% down)
- Take 3 years off work at full pay
- Buy a nice car in cash (and even one for your parents)
- Take a nice overseas holiday every year for 10 years.
That’s a fairly conservative scenario though – what if you met your spouse at age 30 and decided to both save $500 a month from 30-40 with you both on 50k? That’d be $266k in the bank at 40.
Maybe take out $40k for that wedding you had in your early and you’d still have close to 200k to fund a lifestyle of your choice.
These scenarios are all based on your earning the same 50k a year salary from 25-40 as well. What if you increase your savings and extra $50 each year?
I’ll let you do the maths from there.
The point is that your dreams could more accessible sooner. Instead of spending in your 20s or 30s on the big ticket things, you pause those opportunities for when you are 40 and then you have as much freedom as you’d ever liked.
If you target to save for your spending window, the comparison spending in your 30s can look a LOT different opportunities in your 40s.
With the flexibility of cash in the bank. You’ll no longer need to make decisions based on cost and you’ll have the best picture of what money means to you.
- Build a house in the exact location you want
- By the exact car you want
- Travel with your parents the one place you know you’ll all love
- Pay someone to clean/cook/drive you so that you have more time with the kids
- Quit your job and start your own business
We consider our 20s and 30s the window for when we need to make the most of these opportunities, but life is long and with a solid financial base behind us there is no stopping us.
Could you do it?
The savings system might stand up, but our emotions will probably get in the way.
Your probably thinking – “I want to live my life, I don’t want to hold back”.
I agree, it's important to live the life you dreamt of. But the older I get the more I understand life is a long adventure. You have time to do it all – and it's more dreamy when you have enough money to do it exactly how you want it to be.
Throughout those 25-40 years you’ll be tempted by nice new shiny things, what our friends are buying, what Instagram is doing and what you can afford with more income or savings.
Could you do it? Can you avoid lifestyle creep? What would 200k in your pocket mean to you?
It’s the decisions of now v later
While it might seem like you’ll have to make massive sacrifices and totally readjust your lifestyle just to accommodate a system like this, it comes down to delayed gratification.
I’m thinking back to the Stanford Marshmallow experiment now that you might have heard of. Kids were offered one marshmallow now or two marshmallows in 15 minutes.
Let’s relate this experiment back to the theory. You could get a pretty good version of your life by spending sporadically on the big things now in the lead up to your 40s, or hold off and get something twice (if not more) as good later.
What is something you want to buy soon? House, car. Something not critical that you'd like to have. What difference would it make if you saved another 5 years for it? How much better would sit be?
You have the option. It’s up to you to decide what is important now.
Narrowing your spending window
There are two considerations I’ve made in this article – that your spending window opens at 40 and closes at 75, and that (if you are younger than 40) you might think about saving to optimise spending in that window.
While there are opportunities to spend early on in adulthood, holding back on the ‘big ticket’ or lifestyle upgrades that come our way might lay path to an even better life come 40. Hold off on a few things now that could either stretch the budget (get in debt) or comprised by cost (you don’t get exactly what you want), so that you have complete freedom to spend how you like in your 40s.
A by product of this thinking is that you forgo a lifestyle of products and possessions and instead focus on living through meaning. Your money won’t be a precursor to you upgrading your life as it’ll be put on hold until you are 40.
This all goes back to your spending habits and what is important to you in your conscious spending plan. You’ll be best to consider what matches your rich life.
It will take some discipline, but to sacrifice some things now so that we can spend any way we want on everything later sounds amazing.