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.
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.
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Financial Success: It’s Not Always About Your Income — 13 Comments
Great suggestions. It really is about money in vs. money out. If you cannot control that, no matter how much you make you will end up in the poor house. There are plenty of examples of celebrities, athletes and business people who have made millions to only end up bankrupt.
That’s so true. Cash flow is more important than sheer income. Once you know how to manage your money, you can make it work — or at least make your money work for you — and income is secondary.
Lifestyle inflation can be a killer. That insidious thought “I deserve this and I can afford it now” creeps in and takes over. It’s even more powerful when you’ve struggled financially in the past. You have a heightened desire to do the things you couldn’t do when you were broke. I found that increasing my auto-transfers to my savings accounts before I received that first BIG pay check helped. I do the samething every time I receive a raise. My savings go up and I get my hot hands on only a fraction of that increase.
I like focusing on higher income because there’s a point you reach with your expenses where you really can’t cut back much more, it’s limiting. Whereas how much extra income you can earn is not limitless, but certainly there is more room for growth.
Lifestyle inflation is such a battle. Something about our inner spirit just wanting more and more stuff. I continually have to fight against it the more wealth I accumulate.
I like your idea of making “Higher Income = Lifestyle Inflation”. It’s in our mindset that if we can afford many then we buy plenty and not realizing that were in lifestyle inflation. This is good article Miranda, I really like it.
What region of the country you live in has a major impact on your cash flow and ultimately your lifestyle. Many people choose a location to live because it’s near family and are willing to adjust lifestyle choices. Some things you can’t put a price tag on!
That’s a great point! Where you live matters so much. We live in a low-cost area of the country. And we get to hang with family because my parents also live in a low-cost area just two hours away.
Great post. I work in corporate finance so I can see lifestyle inflation with the people I have worked with over the years. They all make a decent income but they also have considerable expenses that seem to get bigger every year. Cars, boats, motorbikes, and expensive trips are all things my peers buy every year. What’s even worse is that sometimes it’s on credit. Decent income but low cash flow because of all the expenses
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.
Great suggestions. It really is about money in vs. money out. If you cannot control that, no matter how much you make you will end up in the poor house. There are plenty of examples of celebrities, athletes and business people who have made millions to only end up bankrupt.
That’s so true. Cash flow is more important than sheer income. Once you know how to manage your money, you can make it work — or at least make your money work for you — and income is secondary.
Lifestyle inflation can be a killer. That insidious thought “I deserve this and I can afford it now” creeps in and takes over. It’s even more powerful when you’ve struggled financially in the past. You have a heightened desire to do the things you couldn’t do when you were broke. I found that increasing my auto-transfers to my savings accounts before I received that first BIG pay check helped. I do the samething every time I receive a raise. My savings go up and I get my hot hands on only a fraction of that increase.
That’s a great plan! Earmark the money before you can lose it to lifestyle inflation.
I like focusing on higher income because there’s a point you reach with your expenses where you really can’t cut back much more, it’s limiting. Whereas how much extra income you can earn is not limitless, but certainly there is more room for growth.
That’s a good point. Your earning potential is basically limitless, while at some point you can’t cut back anymore.
Lifestyle inflation is such a battle. Something about our inner spirit just wanting more and more stuff. I continually have to fight against it the more wealth I accumulate.
That’s a good point. It helps to remember that things won’t make us happy. It’s a good idea to learn contentment on our own.
I like your idea of making “Higher Income = Lifestyle Inflation”. It’s in our mindset that if we can afford many then we buy plenty and not realizing that were in lifestyle inflation. This is good article Miranda, I really like it.
Just because you can afford something doesn’t mean you should buy it. I like your point about the importance of mindset.
What region of the country you live in has a major impact on your cash flow and ultimately your lifestyle. Many people choose a location to live because it’s near family and are willing to adjust lifestyle choices. Some things you can’t put a price tag on!
That’s a great point! Where you live matters so much. We live in a low-cost area of the country. And we get to hang with family because my parents also live in a low-cost area just two hours away.
Great post. I work in corporate finance so I can see lifestyle inflation with the people I have worked with over the years. They all make a decent income but they also have considerable expenses that seem to get bigger every year. Cars, boats, motorbikes, and expensive trips are all things my peers buy every year. What’s even worse is that sometimes it’s on credit. Decent income but low cash flow because of all the expenses