Life Cycle Hypothesis Part 1: Early Twenties

The life cycle hypothesis is an idea that Franco Modigliani came up with in the 1950s. It states that people borrow money in times of low income and save during high times of income. So basically, you borrow money in your early twenties to pay for school, pay off your loans, start saving for retirement when you are working, and then use the money you saved to live off of while retired. 

A whole equation goes along with this idea where C = consumption and W = Wealth, but no one wants to read about that. We graduated high school, so we wouldn’t have to do algebra again. But the idea that going to college will lead to a well-paying job that will allow you to retire seems outdated but still rings true.

Our early twenties 

The expectation for most of us out of high school is to go to college and get a degree. Most parents want their kids to go to college for a better life, but is college all it’s cracked up to be? It feels like every millennial on TikTok and Twitter is always talking about how they will never pay off their student loans and never afford to own a house even though they went to college. And then we hear about billionaires like Bill Gates and Steve Jobs who dropped out of college and became, well, billionaires. 

So why is college such an important thing if all we hear is how miserable and pointless it is? According to a report released in 2019 by The College Board, college graduates who graduated with nothing more than a Bachelor’s Degree averaged $24,900 more in income a year than those without a college degree. So even though some think college is a scam, the stats show some significant benefits to getting a college degree. Forbes has a great article breaking some of those benefits down. (For those curious.

I think the real scam of college comes down to thinking that we need to go to the best of the best schools. And while that can be beneficial for some, it just makes no sense for most of us. Why would I want to get into six-figure debt going to a prestigious university if I want to get a teaching degree? With the income I will make as a teacher, I know that I will never be able to pay back an insane amount of student loans. Finding the best college is about finding the best college that fits your needs, not what some “top 50 universities” list on the internet says. 

To go or not to go

I also understand that college is not for everyone. I know plenty of people who didn’t go to college, but they also didn’t settle. You’d be surprised at how much blue-collar trade jobs make. Honestly, if I could go back and do it all over again, I would think more about going that route than glossing over it as I did. If you want to set yourself up for any form of success, then you need to define what that success is and what it will take to get there. It can be easy to waste day after day aimlessly wasting our time doing something with no goal in sight. But if you can give yourself a goal to work towards, you can push yourself farther than you know. 

My mom made it pretty clear in my senior year of high school that college wasn’t something that she expected me to do. She wanted me to do it because she thought it was best for me, but if I had decided not to go, we would have that conversation about what I want to do with my life. But don’t get it twisted. If I wasn’t going to college, then I wasn’t also sitting at home doing nothing. It meant I had to work or learn a trade. I had to do something. I chose college because school is the one thing I’ve always been good at, and it meant putting off being a real adult for four more years. (Talk about privilege. Thanks, mom!) But like I said, college isn’t for everyone. Just figure out what you want and do it. 

To sum it up

In our early twenties, we can feel so helpless. “I’m never going to make enough money to pay off student loans or buy a house or live a lifestyle I want.” But what we have to remember is that our parents went through the same thing. We were born into our parents’ lives after they went through the beginning part of their grind. I actually have it better at 24 than my parents did when they were my age. My mom was working full-time, making $20k, and going to night school. She tells me stories about how going to the movie theaters with my dad was a rare treat for them back when a movie ticket was $6. I spent $35 to DoorDash a sandwich to my apartment in the city while writing this article. (Seriously, the city taxes and delivery fees are getting ridiculous.) Remember that this part of your life is just the start. We are grinding and busting our butts now so that in a few years, things might not be as chaotic. This is just the first step to reaching our goals, whatever yours might be. 

Watch out for part 2 of the Life Cycle Hypothesis. I’ll be covering how we go from broke and tired to financially stable and saving for retirement. But if you want a jumpstart on becoming more financially stable, then check out why it feels like sticking to a budget is so hard.       

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