When I was younger, I used to think that a higher income was the solution to most of my financial issues. My husband and I were graduate students with loans and credit card debt, and we were certain that a higher income would solve all of our problems. However, this isn’t always the case. While a higher income can certainly help you get your feet back under you, ultimately it doesn’t matter how high your income is if you don’t manage your money appropriately and live within your means.
Higher Income = Lifestyle Inflation
One of the first things we noticed when we started to see a bit of an improvement in our household income level was that we immediately began spending more. We could “afford” a “better” cable subscription. Now, all of a sudden, we had enough money that we could try nicer restaurants.
While these things aren’t necessarily bad, we discovered that the mindset that came with a higher income was, “We can afford this! We make plenty!” The problem was that we weren’t tracking our spending, and we had a skewed view of where the money was going. We just kept up the “we can afford it!” mantra without stopping to see if our lifestyle inflation was truly under control. Imagine our surprise to discover that it didn’t take long to run out of money, even though we had a higher income — and we thought we could afford what we were doing.
Managing Your Resources
Instead of assuming that you can afford higher expenses just because you have a higher income, you still need to manage your money more effectively. As a result of our earlier mistakes, we learned that we still need to direct our financial resources with a little thought and careful consideration. It’s not about a higher income; it’s about what you do with your money.
We sat down and decided what our priorities would be. We knew we wanted to save for retirement, and that we wanted to keep giving to charity. We also had bills and other obligations. Our son was growing, and we knew we wanted to provide him with extracurricular activities that made sense for him — music and sports and scouting. So we put those in the list of priorities as well.
Of course, we like to have fun, too. My husband enjoys collecting items. He’s big into action figures for movies he likes (particularly Lord of the Rings). I like travel. We decided that we both needed to be able to fulfill these wants. We both like to eat out. So we re-jiggered our finances so that we only spend on things that we really enjoy, and that are really important to us. No more of this expensive cable package stuff (we downgraded when we realized we weren’t watching that much), and no more spending on things that were just “okay.”
What About Where You Live?
As a result of our spending changes, we were able to get our spending back in line, and we live comfortably — and get to do most of what we want. However, one of the reasons that this works for us is due to where we live.
We live in a low-cost area. We live in a semi-rural area in Utah. Our cost of living is low because we bought a modest house with a modest mortgage payment, and an “expensive” dinner at the nicest restaurant in town still costs our small family of three less than $100 — including drinks, dessert, and tip. This means that after we take care of retirement and emergency fund contributions, and after everything else is taken care of, we have enough to do what we like.
If we lived in a big city on one of the coasts, it would be a completely different story. A higher income if we lived in San Francisco or in Manhattan would be insufficient to allow us a similar lifestyle. As it is, I can afford to take a trip to a big city and have a great vacation. Living there would be a different animal altogether and it would take a much higher income to make do.
Once my husband and I stopped getting hung up on income, and started thinking about financial management, and how to make the most of our money, we started creating a lifestyle we preferred.