Finance Guide for High Income Young Adults Part 1 - Principles

This captures my current financial worldview. It adapts general financial advice you have probably heard many times for high earning individuals(>80k out of college). This article outlines more timeless principles, and the next article will highlight the specific financial products I use and recommend in 2021.

Review of General Finance Advice

To review, the basics are best captured in this infographic from /r/personalfinance on reddit. It’s a great resource, but to summarize: pay off debts, have a liquid emergency fund of 3-6 months expenses, and maximize all government tax breaks including HSA and 401k especially employee matching. Day trading and actively managed funds also do much worse than passive low-cost index funds.

Principles for High Income (>80k out of college)

Retirement and a rich life is basically guaranteed.
If you earn >80k out of college, then congrats you are in the top 5% of americans by age. If you earned >120k, then pop champagne and post on socials because you are 99th percentile. More importantly, I think you can safely conclude you have the intelligence and conscientiousness that our society really rewards and will be valuable for years to come. You’ve aced our capitalist test and placed fairly securely at the prestigious top of our economy. You could say it is a fluke or luck, not anything inherent to you, but even if that were true(it isn’t) you have probably accumulated enough prestige and credentials that many high paying companies would still make the *mistake of hiring you for decades to come.
If this sounds surprising to you, then realize who you have surrounded yourself with and are comparing yourself to. Don’t forget how saturated your friend groups are with smart, capable people. Don’t forget when you look around that by some measure you have all succeeded already. And most of your income is yet to come! I would recommend looking at the pay scales of your companies, it gets wild up there. In general, if you look at income by age here, then you’ll see that from 24 to 35 every single percentile of workers can expect their income to more than double. If you're earning tech company equity, then you are in a class all your own.
The best financial advice is to get a better job.
For high income individuals, getting even higher paying positions or jobs earlier is much more valuable than saving or investing money. There is a limit to how much you can save, but there is no limit to how much you can earn. While most of your money is in income, time spent micromanaging APR is much better spent optimizing career growth or grinding for interviews to switch jobs. My current favorite strategy for software engineers is to talk to VC’s and generally figure out what companies are close to raising their next round and undervalued. A breakout company that hasn’t raised a round in a while and thus your equity grant will be undervalued on Day 1. But that isn’t the only concern.
A more enjoyable job should be worth a substantial pay cut.
Though finance articles and websites rarely mention it, we must figure out how money should be balanced against all our other values. You spend 8 hours/day at a job. If your job can be 10% more enjoyable over the decades of your career, that should be worth a huge pay cut.
While you could retire earlier with more money, what would you do with that free time? Travel and hedonism is a vacation not a lifestyle. If you want to focus on art or work on an impactful problem, then why don’t you just do that right now? With enough effort and your proven skill, you can earn money from almost any interest. From principle 1, we know that you could earn money eventually if you really needed to. You don’t need the money in the bank for that to be true. 10 years from now don’t you wish you had 10 years of experience and friends in your chosen craft. What you do everyday is what you become, so what do you want to become? This is a hard choice to make that requires both self awareness and courage.
Avoid lifestyle creep and expensive tastes
Unfortunately, no matter how much money you make there will always be opportunities to spend as much as you make. As your income increases, you will find more excuses for nicer hobbies, homes, and vacations. When your other rich friend groups go out, they will want (expensive) novelty and your company. Try to be an active force against all this luxury and lifestyle creep. Luxury becomes a necessity which becomes a burden. As you become accustomed to your income level and lifestyle, suddenly any pay cut or job more in line with your values becomes a threat.
Also avoid acquiring expensive tastes. Don’t develop a fondness for rare chocolate, fine art, or aged brandy. At a certain income level, it can be reasonable to hire someone to do your laundry or clean your house, but your clothes or house never need to be luxurious. Warren Buffet lives in a 220k house in Omaha and eats McDonalds everyday for breakfast.
Any debt charging less interest than the expected rate of return is basically free money.
The historical rate of return from the stock market is about 8%. Crypto banks currently offer >8% APR on stablecoin(tracks the US dollar). Any debt that is a few percentage points lower to account for the cost of managing is basically giving you money. You should take the money and invest it into the stock market or the crypto banks. While you are assuming some risks, if you make enough of this class of bets, they will pay off and as a young adult you have time. Credit cards along with liquid investments mean you only need a small emergency fund. The rest should go into investments. While most guides recommend you have 3-6 months of expenses in cash, I disagree. Credit cards can cover most surprise expenses. Major life shifts can be covered by the many liquid investments you have whether crypto or stocks. There is no reason to skip out on the returns of that much money. As a high income individual, your paycheck passing through your account can give you enough liquid cash to deal with most adversity.