One of the assumptions a lot of people make when thinking about their income is that it will always go up. There’s this general belief that the amount you are earning today will just naturally increase.
The thing is, this isn’t always true. Your income isn’t necessarily going to stick to a single trajectory. In reality, it can go up or down. Family obligations might move you to part-time work. You might get laid off. Or you get injured. Or maybe you hate your job and decide to take a different career path. Life gets in the way and we can’t know what the future holds. I can almost guarantee that a total market index fund will grow over the course of 10 or 20 years. But I can’t guarantee that your income in 10 or 20 years will be higher than it is now.
This is one of the reasons it’s so important to live on significantly less than you earn. You never know what the future might hold and there are no guarantees that you’ll be earning more next year than you earn now. But if you’re living on less than you earn, you can ride out any volatility that comes with your income.
Your Income Might Not Last Forever.
I think my own experience is a good example of how your future income isn’t guaranteed. I started my working career at a large law firm making $110,000 per year. That number eventually rose to $125,000 per year after three years at the firm.
Like almost every young lawyer, I had a large amount of student loan debt too. But who cares, right? This gravy train was never going to end.
I saw this type of belief a lot at my law firm, with my fellow associates living it up and spending with the assumption that they would just keep making this type of salary forever. I personally never understood this type of thinking. It’s fairly common knowledge that big law firms have a high attrition rate. An entering class of new associates might number 20 people. Only 1 or 2 of those people are realistically expected to become partners at the firm making the really big bucks.
On the other hand, the typical big law associate (like myself) will move on to some other type of work within the first 3-5 years of practice. They might go in-house to work for a company, or they might move to another law firm, or they might move into the public sector.
One thing is pretty certain – when you leave the big law world, it’s pretty likely that your income will not keep rising at the same rate. For many people, it will likely fall, at least for a little bit. This is especially true for lawyers that make the switch into public service, which is a common route.
This is why it always I’ve always thought that young lawyers should never act like they’re making the big bucks. The gravy train isn’t guaranteed.
Living On Less Allowed Me To Handle My Own Income Volatility.
In June 2016, I left my law firm job of 3 years and took a position as a government lawyer. I made the switch primarily for personal reasons. I was having issues at work and saw an opportunity to do something that looked to be more satisfying to me from a professional standpoint.
Switching jobs and moving into public service came with a major pay cut. I went from making $125,000 per year to making $75,000 per year – a massive $50,000 pay cut.
But I was able to make this move because I realized that my income wasn’t guaranteed to move in a straight-line trajectory. When I made the decision to search for a new job, I was already on track to pay off my student loans by June 2016. Rather than live the lifestyle of a person making six figures, I had lived as if I was making much less, knowing that my income could drop at any moment. And when my income did in fact drop by $50,000, it didn’t matter to me. I had been living on so much less than I needed that I could handle the change in income.
Live On Less And You’ll Still Have a High Savings Rate If Your Income Drops.
Despite a $50,000 per year pay cut, I still manage to maintain a high savings rate. This was another benefit of understanding that my income would not always rise. I could take the pay cut and it would have absolutely no effect on my lifestyle at all.
In fact, despite taking a $50,000 pay cut, my anticipated retirement savings for the year has dropped by only $1,925. How is that possible?
- The first thing I did was pay off my student loans. I knew that if I was going to start a new job, I wanted to start fresh with no student loan obligations. $87k of student loans gone. Poof!
- In 2016, I was on pace to max out my 401(k), max out my Roth IRA, and max out my HSA, for a total of $26,850 saved towards retirement. My big law firm gave us no match on our 401(k).
- Despite my $50,000 pay cut, I’m still on pace to save $24,925 for retirement (or over $2000 per month). The state gives us state employees a 6% match for our pension and we’re required to contribute 5.5%. That’s 11.5% the state requires us to save for retirement by law, which is pretty darn good actually.
- I then did some math and added in another 10% of my income into a 457(b) plan. I plan to increase this number at some point, but right off the bat, that’s 21.5% of my pre-tax income put away into tax-advantaged retirement savings.
- I made no changes to my Roth IRA or HSA – I’m still maxing them out at $5,500 and $3,350 respectively (the contribution limits in 2016). Add it all together, and I’m still saving a ton of money, despite taking the huge pay cut.
My salary might have dropped significantly, but I’m still doing alright I think.
If You Understand That Your Income Can Be Volatile, You’ll Never Be Stuck.
When I left my job in big law, I was doing really bad mentally. My motivation was low. I was frustrated with the work. And I was constantly stressed and anxious. I needed to make the change, so when I saw the opportunity to get out of there, I took it.
I wasn’t alone. It seems like everyone complained about how miserable they were at work. The only thing is, not everyone could get out. Many people set up their life with the assumption that their income was at a certain level and that it could only continue to go up from there. If they wanted to do something else, they couldn’t. They were stuck.
I think that if you understand that your income is not guaranteed to always go up and you opt to always live on less, you’ll find that the world really opens up to you.
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Kevin is an attorney and the blogger behind Financial Panther, a blog about personal finance, travel hacking, and side hustling using the sharing economy. He paid off $87,000 worth of student loans in just 2.5 years by choosing not to live like a big shot lawyer.
Kevin is passionate about earning money using the sharing economy and you can see all the ways he makes extra income every month in his side hustle reports.
Kevin is also big on using the latest fintech apps to improve his finances. Some of Kevin's favorite fintech apps include:
- SoFi Money. A really good checking account with absolutely no fees. You'll get a $25 referral bonus if you open a SoFi Money account with a referral link.
- Brex. Brex is a free business cash management account that is currently offering new users a $250 Amazon gift card if you sign up using a referral link and meet certain requirements.
- M1 Finance. This is a great robo-advisor that has no fees and allows you to create a customized portfolio based on your risk tolerance. You also get $50 for opening an account.
- Lili Account. Lili is a free online business checking account geared towards freelancers and sole proprietors. Lili is currently offering new users a $100 bonus if you open a free Lili account using a referral link.
- Albert. A great free app I use to track my finances and save more money. You can also earn a $150 signup bonus if you open a free Albert cash account.
Feel free to send Kevin a message here.
Completely agree. This is especially a problem for lawyers who work in the fancy law firms. You start at a high salary and after a few months everybody just assumes it will continue forever. I see plenty of young lawyers spend the first 1-3 of practice mishandling their money. It’s hard to completely blame them as it’s very stressful being a first and second year associate. You need to unwind and there has to be some balance to working all the time and actually enjoying life. So while I don’t advocate for those lawyers to go home and watch Netflix every night, I do try to point out that the gravy train may not last forever and that if they make smart decisions like living with roommates for the first few years they can make solid progress in setting up their financial future. Once you’ve done that, the world really opens up – just like when you decided to jump from the firm and take the state attorney job. Could you have done that if you had another $100K to pay off?
Definitely true. Biglaw is definitely one of those jobs where you have to anticipate that your income will probably go down at some point, assuming you aren’t the type that wants to stay in biglaw forever. Once I got that debt paid off, I really felt free to leave biglaw. Meanwhile, I have a ton of friends who are stuck. They complain about horrible biglaw is, but they can’t do anything about it.
I’m in the midwest, so our biglaw market rate for 1st year associates was 110k, so it wouldn’t have been possible to pay off another 100k in the time I did. For anyone starting law school or considering becoming a lawyer, you need to carefully consider what sort of income you are expecting to make with your expected debt load.
Excellent post- spot on! I only wonder if those that need to hear this message are reading personal finance blogs…??
Thanks!
If your income is very low, government gets in the way of living on less. For example, government has regulated or legislated out of existence many minimalist housing options. Which is why 11 million low-income renters spend at least half their income on shelter.
Love the moral behind this. A lot of young tech Bros think this way as well. A co-worker of hubbys bought a Tesla new and drive himself to Mexico. Right before that, he quit is job. It was about self discovery….to me it sounded like financial suicide! You’re hot tech commodity, I get it, but you haven’t starved yet to understand what you did! (Rockstar move tho. Hah!)