It is important to have a conversation with your older self

By, Bob Peters || January 28, 2022

Settling into adulthood is a process

Settling into adulthood is a process. You do not wake up “fully baked” the morning of your 18th birthday as a legal adult, or when you finish your academic studies. After finishing your education, you then set out to pursue income producing work (aka a job). Unlike jobs of the past where you obtained part time work as you completed your education, you are now in pursuit of full-time work that will be necessary to pursue financial independence.

You should also prepare a Budget to help identify your Basic Needs as well as monies to set aside for Emergency Reserves, Investing Wisely and acquiring Wants. In preparing the Budget you get a sense for what it costs to cover your Basic Needs. Keep in mind that your “20 something Basic Needs” are highly likely to become more expensive over time as you consider better housing, better food, marriage, the cost of children, etc.  Your Wants also grow overtime (i.e., more expensive vacations, a nicer car, entertainment).

People with limited education will need to work hard to cover Basic Needs

While there is no certainty in life, the Social Security Administration data statistically tell us that people with higher levels of education earn a higher income over their working careers.  In the case of men with a graduate degree of education (six years of education beyond high school), on average, they make $1.5 million more than men with a high school education. Another way to show this income discrepancy is that a male (in this case) will on average earn $18.29/hour more over a 40-year career assuming he works 40 hours/week. Statistics tell us the probability, not the certainty.

There are stories of folks with limited formal education who have gone on to earn considerable income. Likewise, there are plenty of folks that have pursued higher education who, whether by choice or not, earn a very modest income. There are many folks that pursue trade skills that earn incomes that support Basic Needs, Investing Wisely and Wants. But the bottom line is that people with limited post-secondary education or no trade skills will not have the opportunity to take many higher paying jobs and these folks will need to work extremely hard to cover their Basic Needs.

Sara and Sam:  A true story about two young bankers

Sara has a degree in Business and studied Accounting and Finance

When I supported hiring Sara, she had been working for a large national bank doing what most young commercial bankers do…they learn how to analyze credit risk and write an internal document seeking approval of extending credit (i.e., a loan to a business) on the terms acceptable to the bank and the business. We will call this job Commercial Credit Underwriter (CCU). Sara has a degree in Business from a public university and studied Accounting and Finance. As a CCU, Sara was not responsible for finding new business, nor was she responsible to negotiate with the borrower…both of which take years to achieve competency.

Sara accepted our job offer of $72,000 of base salary, the potential to make up to 35% of her base salary in a performance bonus, 401K matching up to 11% of her annual salary and bonus, plus health insurance. If Sara wanted to stay in this position, she might be able to raise her base salary up to a maximum of $115,000, in today’s dollars, with the same 35% performance bonus potential, 401k matching and health benefits.

After a couple of years, Sara decided that she wanted to become a Relationship Officer who would be responsible for acquiring new business relationships, working closely with clients and being responsible for the overall client relationship. There were new responsibilities and a new learning curve.  Over the next couple of years, Sara did well in taking on these new responsibilities and was successful in growing her portfolio by bringing in new clients and growing existing relationships. Four years after Sara joined the bank, her base salary went from $72,000 to $140,000 and her performance bonus potential went from 35% to 50% of base salary. Now, Sara was working 60-70 hours per week for four years…more in some periods. There also were “all-nighters” that she had to put in to meet client deadlines.

Some jobs are paid an hourly rate and others are paid based on a negotiated salary

I will contrast Sara’s job trajectory with Sam’s story but first let me note that some jobs are paid on an hourly rate and others are paid based on a negotiated salary with no hourly rate. Hourly jobs pay you a set amount each hour of work performed and there are labor laws that give workers protections, including limitations on requiring workers to work overtime. Many salary jobs that are exempt from certain labor law protections allow an employer to expect workers to work longer hours without additional compensation.

Sara’s Commercial Credit Underwriter job was a salary position (exempt), and Sam’s was an hourly position (non-exempt). Therefore, you cannot simply divide Sara’s salary by 40 hours per week if she was working 60 hours per week…which she was. To make these adjustments, I will calculate Sara’s “hourly pay rate” by assuming she worked 60 hours per week vs. Sam’s hourly rate which is based on 40 hours per week. Now let us learn about Sam.

The economic value of a position to an employer and the supply of skilled labor determines the income potential of a job

Sam had a high school education and took a job as a teller.  Sam earned $15/hour, plus a performance bonus up to 10% of his base salary and the same 401K/Medical/Dental/Life insurance.  The difference is that Sam did not have certain skills in accounting and finance and was unable to compete with other candidates for the Commercial Credit Underwriter position.  While Sam was recognized as a great employee his income potential was limited to a cost-of-living adjustment each year. Why? A couple of things come to mind:

• The skills required to be a Commercial Credit Underwriter and demand for these skills were much greater than those of a teller,
• Being an excellent credit analyst allowed the bank to grow its commercial loan and deposit portfolio such that the compensation paid to Sara was more than offset by the value of her contribution to growing revenue for the bank. There was more economic value created by Sara’s work than by Sam’s. Sam did a fantastic job as a teller and made his customers feel appreciated and well served, but the teller job just did not have the same economic value to the bank.

 The purpose of writing about this is not to make anyone feel bad about their income. Wonderful, caring, intelligent people have jobs that pay less than people with flawed values and a broken moral compass. While it is hard not to compare yourself to others it will serve you well not to become jealous or angry at disparities. You need to ask yourself some basic questions.

What do you want?

Do you want to pursue more education or a different field of study to better position yourself to earn more income? Do you want to work in a field that gives you great satisfaction but limited income? Society functions because we have people pursuing many areas of employment and everyone deserves to be treated with the same respect and dignity. Compensation is driven by the economic value of the job to the employer, the competitive demand for these skills and the supply of skilled employees. Your level of compensation does not define your values or your worth, but it will impact your ability to be financially independent.

The income gap between Sara and Sam widened greatly over time

To wrap up, over four years, Sara’s base salary, adjusted as described above, was $44.88/hour vs Sam’s $16.9/hour. The gap between the two salaries started out at $8.07/hour but after 4 years, grew to $27.98/hour. This did not take into consideration the $22.44/hour performance bonus potential for Sara vs. the $1.69/hour bonus potential for Sam. The income gap between Sara and Sam widened over time.

Compensation is just one aspect of a job. Work life balance is clearly different.  Sara worked 60 hours per week and given the advent of the cell phone and laptop, was always “on.”   Sam worked 40 hours per week and never took work home. Sara could be fired for not bringing in enough new business or losing important relationships while Sam’s job, on the surface, may have had less risk. I say on the surface because not too many years later Sam’s branch was closed, and he lost his job. Customers liked Sam, but came into the branch less and less as they did more of their banking online. Despite Sara’s success, she decided that being a Relationship Officer was not her thing and left the industry.  More money does not mean greater happiness.

Understanding the value of options

There is one last observation.  Sara was paid a salary, not an hourly rate.  She could have worked 40 hours a week, not 60.  If she had chosen to work 40 hours/week she may not have received support for her Relationship Manager position, and therefore her income probably would not have grown.  Sara had an option to work more hours (with no more pay in the short term) which gave her a path to earn more income over the longer term.  Sara understood the value of her option to work long hours and realized the upside.

On the other hand, Sam did not have any option of being compensated more than 40 hours per week.  Many hourly jobs offer less than 40 hours per week, which requires these workers to work two or more jobs to cover Basic Needs.  Although Sam did have health care and retirement benefits many employers do not offer them.  You might think that business owners who don’t offer health care and 401K matching contributions are greedy.  My experience seeing thousands of financial statements for small businesses shows that this is not the case.  Many small businesses don’t generate enough profit to provide these benefits.  The nature of the work is seasonal, and/or inconsistent (i.e., restaurants, hospitality).  Small businesses are more vulnerable to competition.

Have a conversation with your older self

When you are in your early 20’s good health seems like a given! The value of a 401K seems so far out in the distance that it does not appear to compute.  Try to have a conversation with your older self who is the age of your grandparents.  You see that your grandparents have physical needs and no longer earn a paycheck.  If you can envision your future self, you will have a better shot at appreciating the short- and long-term value of education, and the short- and long-term income potential of different vocations.