Some of my favorite questions come from readers who are worried that they’re saving too much. This is a great problem to have. For example, Henry wrote recently with this dilemma:
I’ve been reading Get Rich Slowly since I was 15. At that time, it inspired me to save 20% of everything I earn for retirement. I’m almost 20 now, and I currently max my Roth IRA each year. (Well, I did in 2008 and 2009.) I also take the required percentage to get my employer’s 401(k) match. I also tithe. All of this means that I only take home about 50% of my net (after-tax) income.
I currently live at home, and I’ve wanted to move out, but I’ve realized that while I’m saving the money I can’t afford to be on my own. But if I stopped contributing to my retirement accounts, I could. I also want to open a business by the time I graduate from college, and I’d like replace my car (though I don’t really need to). With as much as I save for retirement, I find it hard to save more money for the things I want today. Am I being stupid to save so much money that I can’t touch until I’m 65?
First, I want to say that it’s awesome to see somebody so young saving so much money. That’s fantastic. In a society where young people tend to spend much more than they earn, here’s a guy who has made saving a priority. Henry, you’re all right.
But what about his dilemma? Is he saving too much? Would it make more sense for a young man to put saving on hold and fund the needs of today?
A part of me wants to tell Henry to keep doing what he’s doing: He’s already maxing out his Roth IRA every year and he’s getting the full 401(k) match from his employer. Combined, these two retirement plans will give him a ton of financial weight once the effects of compounding come to fruition in the coming decades.
So, one option for Henry is to keep contributing to his 401(k) and his Roth IRA, but to intentionally plan to use future increases in income for his other goals. That is, if he continues his super saving, he can use upcoming raises to get his own place, buy a new car, and start a business.
But another part of me wants to tell Henry to seek balance. Money is a tool. It’s there to help you build a life that makes you happy, both today and tomorrow. If he’s not happy today, that’s a problem.
The question, then, is how to find balance. Henry needs to be careful not to swing too far the other way. I think it would be a mistake, for example, to stop saving for retirement completely. It’d also be a mistake to begin using debt to finance the things he wants today.
How can Henry find balance? What would you do if you were in his shoes? I think I’d try to make small adjustments until I found the balance I needed. He might, for example, pick one of his three goals — moving out on his own, starting a business, buying a new car — and adjust his retirement savings downward in order to pursue it. Or, he could stop contributing to his Roth IRA and use the proceeds to meet one of his goals.
Whatever Henry chooses, it’s going to involve trade-offs. That’s one of the realities of personal finance. Though we can generally have anything we want, we can’t have everything we want. Henry is going to have to establish some priorities, and then use his money to meet them.
This article is about Ask the Readers, Choices, Retirement, Savings
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First: I’m surprised by the negative attitudes toward Henry living at home. America is one of the few countries with such an obsession about living on one’s own and young men at home are especially targeted. Yet we’re increasingly disconnected from our families and communities. Coincidence? This site is all about questioning assumptions – why do you NEED a new car, why do you NEED a huge house – how about questioning why you’re so maladjusted if you live at home? True, for some it’s a way to postpone growing up but for many others, it’s just another way to grow up – be there for your parents, learn to ignore the ignorant people who try to make you feel ashamed for not buying into the consumerist notion that you need your own place. If all parties are happy with the arrangement, stop judging. Just because it isn’t right for one person doesn’t make it wrong for someone else.
Second: It’s great Henry is saving so much. Perhaps redistributing the saving would help him achieve a better balance. Divide the “savings chunk of the check” evenly into 3 accounts: Long Term Savings/Retirement, Short Term Responsible Savings/Car,etc., Short Term Fun Savings/Vacation. To echo some of the previous sentiments, sometimes you have to adjust. When you’re young, your lens is such that you often forget you don’t have to have everything lined up right away and that’s what leads to extreme saving/spending behaviors.
Third: Starting a business with minimal startup costs is more rampantly possible than ever before thanks to the internet. Don’t get hung up on the idea you need lots of collateral upfront. And remember that consumer debt is rarely desireable but credit can be leveraged when building a business – Seth Godin had a great post the other day about only borrowing for things which increase in value.
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Son I think you should pat yourself on the back and be proud that you are the measuring stick of your generation.
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Henry, I’m close to the same (27, saving a lot).
I don’t think you are saving too much. Every sacrifice now is worth double in ten years, and 4x in twenty, 8x in thirty etc.
I would rather live in a crappy apartment, saving $1000/month now (when people expect me to) than have to save $4000/month to get the same affect in twenty years, when I would expect myself to have a nice apartment. Just save a bunch now, start your business on the cheap (you don’t need much more than a garage). At some point you will decide you’ve made enough to retire, and you can start spending all your income. At your current rate, it will be sooner than your 65th birthday.
BTW, I love the book “Investor’s Manifesto” by William Bernstein. Very important information for people like you and me. Not very helpful for your current dilemma however.
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@Jan (#2) — Remember, Henry implied he was a *college student*. He’s probably already saving his parents money by living at home (not making them pay room & board). It’s perfectly normal for a student to be at least partially financially dependent on his parents. Especially if they’re paying his tuition, he’s already making enough of an impact on their saving that moving out wouldn’t have much of an effect. Also, if a $5000 Roth + the percent needed for his employer match (probably not *that* much..10% at most?) add up to 40% (50% – 10% tithe), he’s making, at most, about $17k a year…depending on where his school is, that’s barely enough (or not enough) to live on, let alone save for a business.
I’d say to definitely keep up the Roth–remember, its principle can be raided down the line without penalty–and the 401(k) match, but maybe (unless he’s extremely devout) be more flexible about tithing. 10% is a huge chunk to go towards charitable contribution, and most Christians (even very well-off Christians) don’t live up to that standard. Remember, that number was set centuries before “retirement” was even a concept, let alone a financial goal. Of course, if he has concerns about that, he should probably talk to his pastor to see if cutting back on his religious contribution is something he can morally stomach.
If he’s still a student, I’d keep up the super-saving, at least till he’s out of college. At that point, he should be more flexible than most people about raiding his Roth if he still wants to start that business, and gain his financial freedom with the increased income that comes with a college education. In fact, he could probably cut back on his savings then and be in better shape than if he cut them now and started saving later.
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@William: Wow… my sister would not be going to Oxford university for her masters had my mom kicked her out at age 18. She’d have to work crap jobs throughout school just to survive, and never be able to devote the time to her undergrad degree necessary to get perfect grades (as she did by living at home rent-free). And I likely would never have gotten my first degree had I been kicked out at age 18. Maybe if you want your kids to work at a grocery store their whole lives it’s ok to kick them out at 18, but typically those who live at home for university turn out just fine! If you live near a university, as my sister and I did, there’s no point paying for dorms and meal plans. Commuting to school was the best option for us.
I am absolutely not condoning a child free-loading off their parents if they’re doing nothing, but doing well at school IS a full-time job. Hell, Oxford university won’t even LET my sister work while she is doing her masters. That says something.
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@Kevin–he’s putting it in a *Roth* IRA, which means the principle can be raided tax-free at any point (since he’s already paid taxes). Now, I wouldn’t normally condone raiding an IRA, but since it’s a choice between contributing and maybe planning to raid or not contributing, I’d say contribute and be flexible about it. He shouldn’t be touching earnings in a few years, anyway.
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@ebyt — I too fully approve of being financially dependent on your parents in college, but the approach William is suggesting (paying a presumably small rent and helping with the expenses) could actually be a good thing, a kind of adult-lite. Henry can clearly pay at least a little (maybe a couple hundred a month?) and feel like he’s not freeloading.
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@JB: A couple of his sentences in comment #95 hit a nerve… such as “My opinion is that an adult should not live with their parents” and “Any parent who is fostering dependency is stealing from their child, stealing the opportunity for them to fail”. I would argue that by allowing my sister and I to go to university without worrying about putting a roof over our heads, my mom is doing PRECISELY THE OPPOSITE of stealing from us. And as far as stealing the opportunity for us to fail, why the heck would she want us to fail? If you can prevent it, why not. My sister and I have a lot to figure out in life still, and likely will have some failures, but at least we have a good foundation (education).
If a child is NOT going to school, and not paying rent… generally not contributing anything, then I completely agree with William. I also don’t think it’s a bad thing to contribute a little – I had to pay my mom for a certain things – I worked part-time while I was in university. Fine by me.
It’s just the whole “kick them out when they’re 18″ thing that rubs me the wrong way. I don’t see what’s bad about giving your children a good start to life. I know my degree helped me. I’d be flipping burgers had I not gone to university.
I agree Henry could afford to contribute some money to the household and that it wouldn’t be a bad thing… I just don’t agree with some of William’s comments. I lived at home rent-free until I finished my degree. I got a job and moved out 2 weeks later. I don’t think I am screwed up as William implies happens when an adult lives with their parents.
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Having an adult relationship with your adult child and fostering self sufficiency is not the same as “being kicked out”. Requiring that a child contribute financially to their own education is not “neglect”. I would argue the opposite.
My opinion has kicked up quite a bit of controversy so I should make it even more clear. Adults need to be treated as adults. They should be given as much responsibility as possible so they can have the skills and esteem to successfully navigate the world. University is the bridge for many people. Some accrue debt in the form of student loans, some have a scholarship. Parents can choose to help to pay for some or even all of the students costs but the student should learn self sufficiency as well as the academic curriculum.
btw- I have friends, millionaires all, who did bag groceries, wait tables, etc. One is a PhD who fought fires and worked on a fishing boat all summer to pay his own tuition. Another joined the Marine Corps and still another started a landscape/snow removal company, got his Masters in Business, and now owns one of the largest Gov’t contracting firms in Northern Virginia. Not for everyone but there is something to be said about being the captain of one’s own destiny and working your tail off.
This will be my last comment, I apologize to those I offended.
-WR
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Personally I would always risk the good to go for the great. I don’t have much confidence in savings and 401k’s while the government is printing money like it is going over fashion. In reality the money I save is losing value every year at an incredible rate.
That being said I do believe in saving 20% of your income in order to invest in the greatest asset you own – your mind and learn how to be financially astute so that then you can use that money put aside to create passive income and build wealth.
I would always advise that you take control of your personal finances proactively instead of saving long term and hoping it all works out well in the end.
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I’m 30. I went to one of those expensive colleges in a major metropolitan area.
My room and board in college was $10k/yr. Since I moved out of the dorms, I calculated that I’ve spent just over $70k on rent over the years. I’m also $80k in the hole from student loan debt.
If the kid wants to live at home and save a few $$$, more power to him — I won’t criticize that choice. In fact, as much as I’ve enjoyed my independence, I’m not really sure it was worth $70k at that stage of my life.
For me, living at home wasn’t an option, because my parents lived in a small town with no real college access. (Even the nearest community college with decent offerings was 90 miles away.)
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Listen. I still live with my parents and I’m 55.
I have my own private entrance, so I don’t see them much. In fact, just yesterday I saw my Mom and found out Dad died 4 years ago. Who’d have thunk it?
Can’t beat free room and board. Plus, since my Mom’s too old to drive, I’ll pick up groceries, which she buys of course. And a little surcharge to pay for the gas and my time.
Some would say buy your own house. I say, give me another year or two and this will be mine free and clear.
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My biggest question is if you aren’t in his shoes, how do you convince yourself to maintain motivation that the math is really the best route? I am a smart individual starting my 401k 2 years ago when i actually started making main but i still have significant student loans. I am paying off the highest interest loan first then moving on but it is hard giving up 25% of my paycheck to loans/savings. I can rationalize long term this is in my best interest (paying off the loan 5+ years ahead of time and for less money) but it is hard when my only motivation is knowing the math works out that way.
In that way i love math and hate it at the same time. It never lies but it isn’t exactly going to motivate me (though doubling my 401k this year 1k to 2k). Any help with that i am making the right choice is always welcomed.
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Mike @112
HAHAHAHHAHAHAHAHAHAHHAHAHAAHAHAHAH
sighhhhhhh
HHAHAHAHAHAHAHAHAHAHAHAHHAHAAHHHHA
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My recommendation would be to stay at home and save the money you wouldn’t be able to save if you lived on your own. While you are living with your parents, try to look for jobs that will pay more as you gain work experience. Once your salary increases enough so that you can afford to pay rent and save, then I would think about moving out. Otherwise if you move out right now, you’ll just be hindering your savings.
On advise on starting your business, I would start it while you are living with your parents. I would also use money/resources that you are saving for your retirement to start your business. You are still young and can afford to take the risk in starting your business.
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” he already has a substantial amount saved for retirement in comparison to his peers”
That’s like saying he’s winning a race with a bunch of snails. Disregard what peers are doing. Choose your goals and align your behaviors with them. Is it to retire early–you’re all set. Is it to start your business–then put some savings into something more liquid or start finding investors.
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I’m 28 and I still live at home.
I have a very valid reason for doing so, that is all about maturity and accepting the responsibility of a grown up, but I won’t get into that here because I don’t need the approval of strangers to make me ok with my situation.
I will just say that people shouldn’t assume that a person who stays home well past the age it is expected for children to move out is just mooching off of their parents.
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Ok, I’ll throw in my two cents here…
I was one of those people “kicked out” at age 18. I paid for my college ($40K student loans) and spent the next 5 years under a nearly unbearable load of debt. I was not able to save a penny for retirement until I was over 30 years old. So to all those people who think this is a great way to live — it isn’t. By age 23 I had been working 2-3 jobs and going to school for 4 years, and I ended up with mono and then chronic exhaustion. It took me 2 years to recover enough to be able to work a “real” job and I still have a weakened immune system.
Sounds great, doesn’t it?
If living on your own is not important to you, stay home and use your money elsewhere. If the business is important to you, loosen up and stop contributing to a retirement account (I would lean toward taking the matching contributions). If you really, really want a new car, then save up and buy one.
The important thing is to stop comparing yourself to others and start comparing yourself to YOU. Who do you want to be? The guy with a cool car who is a little short on savings? The young businessman who retires at 35? Find your success story, find what you need to do in order to follow it, and then do your best. Maybe you won’t succeed, but it is important to take risks and do what you want.
Along these lines, if tithing is important to you — then tithe. This is YOUR money, YOUR life, YOUR goals, not the life or goals of a semi-anonymous blog poster, and you have to ultimately choose your own path.
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Hi Henry,
Nice job on both the savings and scholarships.
I like the idea that you are investing for your future either through retirement funds or your own business. Can you work on your business while in school? Can you get more experience (internship or school credit for a project)as part of your school experience? A way to enhance your business maybe?
I don’t think you are saving too much, but I’m hoping you are or will consider
reallocating some of your money for other goals. The fact that you are questioning the amount of savings indicates you might need make some adjustments to what you are saving for. Consider saving for something unique to your situation. I’d also advocate for some travel or adventure to save for.
I like that you live at home,saves beaucoup bucks, plus I’m guessing it gives you a stable environment for your work/school life.
If the right situation presents itself, you probably can move out and enjoy it. Just squiggle a little savings into your shoestring student budget to keep yourself in the habit of saving.
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To answer this question, I would be screaming “no” from the mountaintops.
As long as you’re “paying yourself” first, and enjoying life within reason, I say save all you can.
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@Jan#2-After reading Henry’s reply- I changed my mind.He sounds pretty responsible- scholarships and all. He is still saving too much for retirement-and needs to save for things like a place to live BUT living under mom and dad’s roof is fine since he is still in college. I think there is nothing wrong with living with your parents as long as they are prepared for you to be there. Most of us are prepared to have a child at home through age 22. Obviously the federal government knows lots of people are home until 25 because they just increased the age for health insurance on a parent’s policy.
As for those who feel that it is no skin off a parent’s nose to have another adult around living in a house for free- take in a homeless person lately:>)? Our monthly savings increase a great deal once both kids were out of the house…and decrease when they need to stay here for a month or two in between jobs. We love them- and wouldn’t have it any other way- but it is reality.
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Henry has done a great job at an early age and should be commended. He also is facing up to challenges that will present themselves for the balance of his lifetime. “What are my priorities?” One rule of thumb is to “save 10% of everything you earn” with the idea that you can consume the remainder.
The question is fundamentally not about correct individual purchases (like a car, starting a business, etc.). The challenge is about the continued discipline of arranging your purchases to fit within your budget and NOT arranging your cash flow to fit your desired purchases. Stated differently “live within your means.”
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I’m with Mick at #102 – Henry, you’re doing great. I think it’s really smart to live at home while you’re in school. Lots of people get distracted from school/work by housework, housemates, landlord/neighbor issues, whatever. Your focus is right where it should be.
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Henry has developed the savings habit. Congratulations! Savings will always be with him as long as he maintains his habit.
Consider paying some rent to your parents and say home. It is chaepaer, will help your parents and you should not hurt your savings
plan. Put some money into CDEs. Get short term CDs and when they mature, either spend them or roll them over. When you start work, bank your pay increases instead of adjusting to living on them. Put money into a good mutual fund. Add to it regularly and you will be surprised at how fast it grows. In college, be sure to take an investing and money class. You will be glad you learned about stocks, bonds, insurance etc. Keep up the good work, but invest, don’t just save.
Manage your own money. Nobody will watch and care for it as well as you will.
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I think that reducing contributions bit by bit to the retirement fund is quite important as that way he can save for a house yet benefit from the compounding interest on his current balance.
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Starting so young Henry could “rough it” for a shorter period of time – say 5-10 years and save enough to hit his target goal for retirement at age 65 and not have to worry about retirement funding the rest of his life… I’d say Henry should figure out how much his target amount at 65 will be adjusted for inflation of course.
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I think it’s great he’s gone gang busters on putting a lot of money in retirement so early, what a great strategy, that money will be worth so much in the long run!
If he feels it is time now emotionally, socially, whatever, to become independent, it is time for the money to reflect that change and growth. The time in early adulthood living with your parents is to prepare for the future and he sounds like he’s done a great job of that. If it’s time to fly the coop, that’s where the flow of money needs to go now – obviously still ensuring retirement savings gets it due.
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Reading this makes me so glad that I’m a student in the UK. I left home at the age of 18 because I really wanted to, and I think that it helped me grow up a lot! I’m about to graduate with £10,000 of student debt, but in the UK the interest rate for student loans is only the rate of inflation. I would never have thought about moving out if I had the ridiculous expenses you have the US though, but I’m glad I had the opportunity too. In Scotland Scottish citizens have tutition paid by the state (so the loan was only for living expenses, obviously I worked part-time as well).
If I was Henry I would prioritise moving out (only since he seems to want to) since his tutition is paid by scholarship so he’s not amassing mountains of debt and he has a 6 month emergency fund. A car is more of a “want” than a need, really, and if his college is in a city and he moves near to it he probably won’t need to drive as much.
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There is no easy answer to the question.
Saving the max in retirement accounts
Allows for a comfortable retirement
Due to the penalties means that the money is set aside for retirement
In the event of early death will mean that there will be cash set aside to support a family (no widow complains about her husband having to much life insurance)
Saving lots now means that if life events changes (such as losing one’s job, or having a large family) one can reduce savings for retirement without to much future pain. You are planning to run your own business, which means there is no guarantee of a secure income and therefore means to contribute money to a pension fund.
It means living at home, I did this till I was 25 and paid board, it was quite good.
I am living in Ireland and a 20 year old can only put away up to 15% of their income into a pension fund and get tax breaks whereas a 60 year old can put in up to 40%.
What are you going to do with a large pension pot?
Leaving home
Is quite good (I left home (in New Zealand) at 25 to live in Ireland and have enjoyed it).
Does mean that one needs a cash cusion in the event that things go wrong (when my job ends at the end of the month I will have a reserve of about €15’000 to which is enough to live on for at least one year without welfare help). I suspect from reading your information that you are saving about 20% of your after tax income (I stand to be corrected) in non pension savings.
If one is planning to start one’s own business you will want a very large cash reserve just in case.
More financial freedom.
Worst comes to the worst at retirement social security is enough to just live on and support your needs – although few would desire to live on this alone.
Tithing
Your money your choice, if you are religious give what you and god decide to give and to the group(s) that god directs. If not religious it is good to give but do it because you want to.
My advice
Tithing – between you and god not us, but I do endorse it as a Christian.
Set aside some savings for short term use – car, business, leaving home.
Have an emergency fund.
Make sure that are getting all of your employer’s match for pension contributions.
People make financial mistakes all the time, you could go bankrupt and still end up with a good pension, it would just take more effort to fix the financial hole, you are looking after your cash ok so you would be more likely to do this.
Saving money to buy a home should be taken as equal importance to saving for a pension.
Leave home when you have enough cash to support yourself with a decent cash reserve should your income levels drop. But it is no harm to stay living at home. What do you really want?.
Keep Saving!!!!!!
It sounds if you are religious person (my appologies if I am wrong) so have you asked God on his opinion and will, he would be happy to hear from you.
My own situation
I probably save more than many (10% for pension, 20% for general savings), but am soon to be unemployed, but still will keep drip feeding money into my pension fund from savings (I will be entitled to welfare). I have been told I talk to much on money and to spend some of it on enjoying Europe. I look at the pension calculators and think maybe I need to save a bit more.
I also do not like the thought of living without a cash cusion.
Sorry for the text below, but since due to the number of lawsuits in America I better be sure
Finally use all of my advice at your own risk!. We don’t know all of your details or situation and I am not a financial advisor, so please don’t sue me if you lose all your cash and go bankrupt and end up living on the street. I take no responsibility for the out come of your actions because of this advice. If you want further help you should seek a financial advisor on a fee per visit basis and talk to them as they can give you advice which you can trust and sue if they are wrong.
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Henry,
I’m only two years older than you. Who cares if you are ferreting away every last penny? You could get creamed by a bus tomorrow.
Get your own place. Invite your friends over for a dinner party. Get hammered and blast music. You are young and wasting your youth. YOU HAVE the next 45-50 years to work and save money. Seriously.
Of course, I’m not saying don’t save money. I live in an awesome apartment right above the subway, so it’s perfect place for my friends to hang out before going to bars or seeing music. It really is sooo much fun. That said, I still put away like 6grand in my 401k a year and and have amassed like 35 grand in savings over past 3 years. I still have a new car paid in full, and buy all the electronic toys i want. ENJOY YOUR LIFE. You seriously never know when it will end.
My next door neighbor growing up (my age) was diagnosed with a brain tumor and died this year. You know what he told me? Enjoy every minute of your life bc youll never know when it’s going to end.
My advice henry: work hard, play hard…go have some fun. Don’t pinch pennies. Buy a round of 18 dollar martinis for all your friends and don’t worry about it.
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Henry, there has to be a point where you define the line between saving too much and just right. If saving that much is getting in the way of things that you need to get done, then yes, I think you haven’t found that balance yet.
I’m also saying that the amount you are saving is fantastic, but it can get to the point where it is too much. You need to figure out where you can pare back in savings to get the things that you need to get done. Keep saving, but not in the way that it impedes on your happiness.
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I can see myself in Henry. I perhaps more than 50% of what I currently earn unlike most people my age because I believe that I cannot be an employee all my life. I don’t want to. You know the magic with starting now and young? It’s the time. Many older people would always have regrets in life that wish they did better, saved more and I guess it’s a wake up call for everyone to start today because it’s better than tomorrow.
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