make money now versus make money later

OK, think fast: two jobs. One pays $50,000 this year; it will have a steady raise keeping pace with inflation (more or less) for the next 20 years, but there will be no spectacular bumps up. The other job pays $15,000 this year. In 10 years it might give you the experience to make $100,000 per year – or, if you haven’t done that well, it might pay you $15,000.

What do you do?

photo credit: Nadya Peek

I would argue this is at the core of your personality for many reasons. If I told you that I would give you $5 straight out, or we could flip a coin and heads you’d get $10 or tails you’d get $0, what would you choose? Investing works the same way: conventional thinking tells us that index fund investing is the way to go. You can’t beat the market! Hang in there – there has never been a 15 year period where the market didn’t go up! Be average – hope for the swelling tide to lift you along with the rest of humanity! Bet on the sure thing – take the $5!

So what does that tell you? Do you want to make money now or make money later? Would you take a job for free today with the promise of making more tomorrow? Or do you want cash in hand, thank you very much? Honestly, both are legitimate arguments. I’ve turned down two jobs in investment banking because they were bonus-based compensation and I knew that even though they might be worth 150% of what I was making from contracting, they also might be worth 70% of what I was making. You know what? That’s weak thinking.

Risk taking is fundamental for wealth building. I’m sure Warren Buffet would argue that he doesn’t take any risks: he studies exhaustively and then invests without concern because he’s done his homework. My grandfather did awfully well (until 2000) in the stock market, too, although he certainly didn’t have access to the type of research that WB does. It’s possible to take some measured risks and achieve success as long as your definition of success doesn’t mean being the wealthiest man (or woman) in the world.

I want to make money in the future. I’ve set up my lifestyle to make money in the future. I claim to want money in the present so I can retire now, but I spend a lot of time talking about making it now and coasting along on a decent contracting income without building my investments aggressively or a business or even my own knowledge (which deteriorates every day).

Here is the question: what’s the main thing you need to do? Invest better? Build a business? Or just continue to slowly build income and plow your increasing income – through maintaining your standard of living and putting the excess into savings – into slowly building wealth? One of my favorite reads is Get Rich Slowly, but do I want to get rich slowly? Depends on how slowly you mean…

13 comments

  • Good topic to discuss, but can’t we have our cake and eat it too? As far as investing goes, I am a huge index fund guy. 90% of my ROth is in index funds, but I do dabble in individual stocks too. They are riskier, obviously, but I do my research and so far I’ve done pretty well (one of them is Berkshire Hathaway (a B share, of course)). I think we can automate our current lifestyle (the “sure thing”) so that we’re doing all the Get Rich Slowly stuff and then venture out into finding ways to make more money now, faster.

    Does it work? I’ll let you know.

  • I disagree that indexing is ‘average’ – for most people, it’s the best strategy they can follow.

    In your examples there is a very real chance of hitting the jackpot if things work out but as far as I’m concerned, this doesn’t exist in investing. If I thought I could spend the time and effort and beat the market then you can bet I would give it a try but the fact is that I don’t believe I can (or anyone else for that matter).

    Mike

  • The photo certainly caught my attention, Steve 🙂 . Let’s see if I can rephrase the argument. I build personal and professional relationships (not as well as I should, but that’s another story) in expectation of a future payoff. That’s taking a risk, with my time and effort, but it’s one that has usually paid off in time, albeit sometimes in unexpected ways.

    I invest money, which often entails risk. If I take on too much risk, it ceases being investing and becomes speculation (anyone remember Casey Serin?). The point is to rationally choose your spot on the risk/reward, certainly to make money, but also as something you can identify with thought your investing life.

    In a job, or in an investment opportunity, you take on what you believe you have a reasonable (defined by you) chance of accomplishing successfully, and something that engages you personally and professionally. If you’re doing it from the standpoint of the prospective reward, I think you are simply increasing your chances of failure.

  • Starting at $50,000 and making 4% raises for 10 years gets you to $74,000…not that much less than the $100,000 you could _possibly_ make after 10 years by starting at $15,000…and not enough of a difference to make up for the lower salary in the beginning of the risky plan. No question for me, I’ll take the safe bet in that case.

  • “Its possible to take some measured risks and achieve success…” That’s the gist of it right there – What is a measured risk? For some it could be indexed funds, for others it could be an individual stock, and yet others it could be government securities. What is the risk and what is it backed by? Many got rich working for low salaries at internet start-ups and did well when the company went public. Others had their options turn worthless. There’s really so many variables here. It comes down to figuring out your own philosophy and doing what you are comfortable with.

  • Most people think short term, its just our nature I guess. It is hard to change your way of thinking but the sooner you do, the better off you will be. Of course everyone would like to get rich quickly, but most of the time thats just not an option.

  • I am tackling it from both ends. I’ve adhered to the Get Rich Slowly approach while steadily seeking ways to supplement my income. The slow approach certainly works, but speeding up the process is always welcome.

    Oh, and I just wanted to throw in my two cents on indexing: It is average by its very nature. The whole concept is to cast the widest net possible in order to mitigate loss and capture the market’s average return.

  • Good comments, all! Here’s more background: I have played the middle to this point. I am successful by any standard measure, but I wonder if I had gambled on the big return if I could have done better. Woulda, shoulda, coulda. The question is just whether an above-average life is really enough better than an average life that it’s not worth taking a risk for the excellent life – if that sentence makes any sense.

    Obviously I’ve played it the safe way – high level of education, conservative investing, etc. I still think it’s worth considering this: should I dump 50% of my net worth, for example, into starting a business or investing heavily in something semi-risky? I might set my family WAY back, but then again I might wrap up the financial freedom 9 years ahead of plan.

    It’s an impossible question to answer without more information, but at the same time it strikes at the core – how much risk to take on. I wish I knew the answer.

  • Shawn@MoneyBrick

    Steve,

    You mentioned that Warren Buffett says he takes no risks, but at the same time your grandfather was making loads of money up until 2000… so that really goes to show that Buffett in fact was not taking any risks and that your grandfather did. Don’t feel bad, however, as I think the majority of people in the stock market took a hit around that time. I would argue that your grandfather (if he had the time) could’ve also dug up all the same research which Buffett had.

    One last thing; in your example about the job offerings, I feel that taking the $50,000 job is actually the ONLY choice! The other job does not seem a “risk” as you’re trying to define it – it’s something like MLM… lure you in in hopes of the BIG PAYOFF. Or like the lottery, “The more you play, the more you are sure to lose.” (Adam Smith). Basically, money today is worth more than money tomorrow for two reasons; inflation and the power of compound interest (or investment returns).

    Shawn

    • @Shawn: Well, risks are relative. Someone who knows the odds in advance takes no risks. Someone who has a good possibility of predicting the risks takes few risks. Someone with good market knowledge – products, managment, etc. – but no knowledge of the risks takes a huge risk.

      And just to play devil’s advocate, compound interest/investment returns and inflation have been our bywords up until the 21st century. Are we sure those models will continue?

  • Steve, here’s a question. What would you do with financial freedom? Today? I would guess that many of us dream of taking several months off to pursue interests, but meaningful and fulfilling work is part of a full and rewarding life.

    I seek, well, financial adequacy, I guess. I look forward to a time, in the not-to-distant future, where I can move to Paradise (well, okay, Hawaii), not worry about keeping up a six-figure income, but still work at something completely different than I’m doing today.

    So what’s your end game here?

    • @Curmudgeon: Great question – maybe the ONLY question. I can answer it quite easily… I have only three real passions in my life, and two are quite closely related. One, my kids: I love spending time with my son (most of the time – we all have our days) and I imagine my daughter will be just the same. Two, my wife – she’s my intellectual equal and I love debating, talking, arguing, whatever with her. Three, teaching. I have always enjoyed teaching and trying to “download” (to get horrendously geeky) my brain.

      That’s it. I have told Bubelah before that I’m a freak: I have no real need to do anything other than play with the kids, maybe tinker with the blog, and keep up with basic household chores. I have minimal (or no) desire for professional achievement.

      I worry, of course, from time to time that this is a mental defect… but I’ve concluded that basically I’d either make a great teacher or a great househusband who writes as a hobby, not a profession. Go figure.

  • @ Steve – I feel the same way. Even considering becoming a teacher so I get to teach and spend summers with the kids. Keep hearing how bad working for the NYC DOE is though…We’ll see.