It’s easy to begin to develop a feeling of entrapment at a job when things get tough. When things start to get stressful it feels like it’s time to just take a break from your life. A lot of people after high school decide they want to take a “gap year” as a way to explore the world while their young. Or some do this after college before entering the workforce. Now, some are doing this while in the workforce after feelings of burnout.
I spoke with a younger guy at a party who was a little more fresh out of college. Maybe just a couple years. He was in marketing and I could sense he didn’t seem too thrilled about it and working the rest of his life. He was a pretty active guy and I could relate a bit and understand his frustrations.
I decided to mention the ideas of early retirement/financial freedom to him… and I could tell he was lost. I had introduced a foreign concept. A glazed look in his eyes began to develop. After all, retirement is far away right? Sometimes it’s hard to introduce such a strange concept since we’re so used to thinking of it as something that happens in our 60’s rather than in our 50’s, 40’s, 30’s or even our 20’s for the early bloomers!
Instead, he started to shift the conversation to taking a year off here and there. The “occasional gap year” he called it.
What he was talking about was taking time off randomly for a year at a time. A hiatus from his career to travel or do however he pleases.
While it really does sound like a good idea at first thought I couldn’t help but wonder, “How much longer will that chain him down to the job he doesn’t seem to like?”. After all, even our daily habits can cost us years.
Is a gap year the answer?
It depends. How do you value your younger years to your older years? Are they more important? The gap year is a wonderful idea in theory. After all, you get to take a year off and travel the world or do as you please. Sticking it to the man and not letting the big corporations control you! But in doing so, it can come at a pretty large cost. Especially, earlier in your life.
But how much does it actually cost you?
Let’s say, for example, you were making $50k per year and spent $25k in expenses for those first years in your career. After taxes with the current tax setup you would bring in around $40k. That leaves you with a savings of $15k per year. Great start!
4 years into a career let’s say you were fortunate enough to save all of that $15k per year. That comes out to a whopping $60,000 saved! If it was in investments at a 7% return then you’d have around $71,000. Now you have all this money working for you!
Cue the gap year!
Now you’ve taken a gap year. You’ve come back refreshed and feel on top of the world! However, some things have changed since you last were in the workforce.
- It took you 6 months to find a job because you left and had a hard time justifying your time off to an employer.
- You lost experience rather than gaining it making you not as valuable, but luckily still found a job at $50k.
- Spending $30,000 that year and a half brought your savings down.
- Since you invested you recouped roughly $7k bringing your total amount back to $48k.
Since you decided to take a gap year it has taken you back a bit on your savings. Now, a year and a half later you have saved up $48k in the bank. Not a bad nest egg at all, but at what cost?
What would you have saved had you continued to work?
If instead, you decided not to take a gap year your numbers would obviously be a little better. Your numbers would actually be $103k in savings had you decided not to take a gap year! Yes, that’s right. It would be OVER DOUBLE had you continued to work, save, and invest. Plus, you would have still had time for vacation in there. Probably was right around the time where your promotion was due too… how does that gap year feel now?
What did that cost you in the long run?
Are you ready for this? I hope that the guy at the party is reading this. Let’s add it up…
Total Cost = 103 – 48 = $55,000
Right off the bat it cost $55k taking that year off. Not a great feeling if you want to retire earlier, but you’ve got plenty of time right?
But wait, there’s more!
It actually would have been earning interest somewhere had you been a thrifty investor of the overall stock market. To make these calculations simple I’m going to assume you never made any more money and kept the same savings. Since it’s been almost 6 years since you graduated we’re assuming you’re now 28 years of age (for the purpose of this exercise).
Even in doing that, had you not taken a gap year and stayed the course you would have achieved financial independence by 47 years old.
So when would you retire with that gap year?
By 50 years old assuming the same spending patterns. You lost 3 years because of that gap year. Honestly, it was probably more since you likely had a raise in that time and that can have ripple effects in the term of your career!
That 1.5 years ended up costing the guy at the party 3 years! That’s twice the amount of time of freedom and likely more due to the ripple effect. Had he done multiple gap years in his career it would have just kept putting him further back in multiples.
So how does that gap year look now?