Most recent college graduates feel like they don’t have a dime to their names. They probably have an old beater car, some second-hand furniture – or, better yet, cardboard boxes and milk crates – and probably a hefty student loan debt from their friends at Sallie Mae.
They may be getting a paycheck at the new job, but now they are faced with the costs of living that they didn’t have to deal with back in college – rent, buying a car, furnishing a place, insurance, food that doesn’t come from the student union, etc.
They feel like they have to be adults now, but they feel like they don’t have a dime to their names.
Does this describe you?
Feel like you don’t have anything in the world?
Yet, if you’re a twentysomething who feels this way, you probably don’t realize that you have an enormous asset.
It’s worth about a half a million dollars, and it’s all yours, to choose to do with it what you want.
You can make it worth much more.
Or, you can fritter it away. It’s your choice.
What is it?
Read on to find out.
The HUGE Asset Most Twentysomethings Don’t Realize They Own
While as a twentysomething, you may look at your bank account and see very small numbers and look at your student loan bills and see very large numbers, you do have something that is very valuable.
You have the ability to earn an income.
The average 25 year old in the U.S. earns $44,970 per year. With a graduate degree, he can earn more, but for now, let’s just look at the average 25 year old’s salary.
I ran a simulation to see how much the average 25 year old couple both earning the average salary would earn over the next 30 years. Using the historical ranges and average inflation rates, I did 10,000 simulations, and, assuming that our average 25 year old couple only received pay raises that matched inflation, I looked at how much they would earn.
On average, over the course of 30 years, this couple would earn $4.35 million dollars in wages.
Because of inflation, we know that a dollar today is worth more than a dollar tomorrow.
To calculate how much tomorrow’s dollar is worth today, we use a formula called net present value. To arrive at a net present value for tomorrow’s dollar, we must solve for how much money is needed today, invested at a given rate of return, to have a dollar in the future.
I calculated the net present value of the wages that our hypothetical average salary couple would earn over the next 30 years, using the average return of the S&P 500 as the discount rate.
The average net present value of future income for this couple was $1.05 million dollars.
That means if this couple had $1.05 million at age 25 to invest, they would, getting average returns, be able to convert that money into the wages that they’d earn over the next 30 years.
If you’re a twentysomething earning an average salary in the United States and you plan on working 30 years and only having raises that match inflation, that earning capacity is worth a cool half a million.
Let’s take this one step further, though.
What happens if our hypothetical couple are shrewd negotiators, and they bargain hard in the first job (or they have engineering degrees) and can earn a 5% higher baseline from which those salary adjustments are made? How much of an impact does that make?
On average, the total earned by this couple increased almost $218,000 to nearly $4.6 million.
How much does that future earning convert to in today’s dollars?
It’s now worth slightly more than $1.1 million for the couple, or $550,000 per person.
Increasing baseline pay from $44,970 per year to $47,218.50 per year – a $2,248.50 difference is the financial equivalent of someone handing that 25 year old a check for $26,332.
How much does that 5% pay raise play out in terms of overall wealth?
To answer that question, I ran another simulation of 10,000 scenarios. I assumed this couple saved SAFEMIN and was invested, aside from the retirement shoulder years, in a 110 – age allocation to stocks and the remainder to corporate bonds. I used the range of historical returns of the S&P 500 and the corporate bond index to simulate investment returns. At retirement, at age 55, the couple spent half of what they had been spending and used investments to fund all of their expenses.
How did they do on their 85th birthday? How much richer were they for having the 5% raise?
On average, they had a little over $331,000 more wealth than they otherwise would have (note: the negative numbers would be because of high inflation right before retirement and low returns right after retirement; I would expect the average person to adjust their spending to account for this).
If you’re a twentysomething who is feeling poor, cheer up! You have an enormous asset! What you choose to do with that asset is up to you. You can help it grow, or you can fritter it away. You control the outcome.