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You Do Not Have An Earning Problem. You Have A Spending Problem

Let me begin this blog post with a story about a friend of mine. For privacy’s sake, let’s call him M. Savard. No, wait, that would be too revealing. Let’s go with Mark S.

Mark recently got a promotion at work. Before taxes, he’s making about $10,000 more than before. Mark was thrilled. Not only did his boss recognize all his hard work, but this raise was going to be the impetus he and his sweetie needed to finally lick those pesky credit card debts. They diligently funneled most of Mark’s raise towards paying debt for the first couple of months, soon enough they’d have the debt kicked to the curb. But then, stuff started to happen.

Mark and his wife decided they were going to get a dog. And then a second dog. They love animals, see, and they can afford to take care of them now. Total costs for both exceed $100.

Mark’s new position is a little more stressful than his last. So a week’s holiday to Las Vegas was needed to blow off some steam.

The couple also decided to buy some new furniture, since they finally had the cash. Their dog promptly peed on their new couch a mere two hours after it came home.

What I described above is a classic tale of lifestyle inflation. Somebody gets a raise and immediately starts spending their brains out. It’s happened a million times before and it’ll happen a million times again.

But wait, you say, I already know about this. I’ve read about lifestyle inflation before and I already guard against it. Whenever I get a raise I always increase my savings rate so I’m saving a percentage of the new raise too. I’m a smart personal finance type person, I would like a gold star please.

Well, sorry, you’re not getting one. Why? Because all that strategy does is control lifestyle inflation.

If you get a $10,000 raise at work and you only have $1000 extra in savings from it, I’d argue that’s a personal finance fail. Sure, you saved $1000, but it’s nothing compared to what you could have saved. Celebrating a minimal achievement will only ensure the future is filled with minimal achievements. Mediocre results should not be greeted with champagne and pats on the back.

Most people have a spending problem. They spend money on Starbucks and dinners out with their friends and One Direction CDs. These things are relatively minor, but they have a way of adding up over time. They also commit larger financial sins like buying too much house and driving new cars. Forget for a second that there are often legitimate reasons behind these extra expenditures, the fact remains that spending extra money is taking you away from your financial goals.

In North America, we have lives of incredible comfort. In the span of 70 years we’ve gone from legitimately worrying about how we’re going to feed our families to eating for sport. We’ve gone from having to send a letter across the Atlantic to firing up our laptops and actually having a face to face conversation. And we’ve gone from relieving ourselves in a giant hole to having futuristic Japanese toilets clean our nether regions for us. I so want one. What a time to be alive.

I’m not saying you should do without the comforts of today’s world, I’m just saying maybe it’s time to be a little more selective. Do you really need Netflix and Xbox and an iPad? Do you think you could maybe make due with only one? Maybe you could hang onto your 42′ TV a little longer before you upgrade to the 50′ one. Don’t worry, Black Friday will still be around next year.

If you’re consciously aware of your spending at all times, it makes it easier to supercharge your savings rate. If you cut relentlessly on things that aren’t important and spend intelligently on things that are, you can get to the point where you can start saving 100% of your raises. That’s the point where you start seeing real results.

Again, nobody is saying you shouldn’t be pushing hard to make as much money as you can. The secret is to not spend it. If you put it away and let it grow then you’ll be on your way to financial freedom. Isn’t that the whole point of all this?

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9 thoughts on “You Do Not Have An Earning Problem. You Have A Spending Problem

    • I’ve committed myself to much of the same. When (if?!!) I get a raise I plan on increasing my 401K contribution by an equivalent amount. You can’t miss what you never had.

  • I haven’t gotten a raise in over three years yet costs for most stuff have gone up. We’ve cut where we can but the amount we’re able to save has been steadily decreasing. So, I sort of have an earnings problem 🙂

  • I completely agree with the overall tone of the article Sandy with reference to spending being the issue rather than earning but I would beg to differ on one point.

    All kinds of savings should be encouraged. The long term personal savings rate is 6.92% in the US and in October 2012, the rate was 3.4%. So if someone gets a raise and puts any portion of that raise towards savings, its a good/positive thing in my opinion. I understand that an individual can always do better but the flip side is that they can always do WORSE and not put any of it towards saving. So I disagree with classifying it as a personal finance fail. I think that starting with putting something extra into savings can generate the momentum required for a person to see subsequent accumulation and result in the desire for that person to put even more into savings.

    To use an analogy, if a person is eating too much and they cut back by 400 calories a day of crap but they are still over eating by another 500 calories, we don’t tell them they failed, we congratulate them on their success so far and encourage them to further reduce their calories.

    I see where you are coming from, I just disagree on the definition of failure/success 🙂

    As a side note, I really like the blog and would love to be cheaper than I am …I’ll get there…lol

  • Great tale of how inflating ones lifestyle can lead to poverty. I have started my own personal finance blog because I too have overspent and I am now trying to work back to $0 debt.

  • I agree, there almost has to be some kind of deprogramming mentally. I once heard a man who worked in advertising mention the tag words that were most effective, one of them was ‘new’. But I do think many of us have earning problems, I know I do (I have a neurological disorder which doesn’t help). Many people are employed part time, if at all, which is my dilemna. What has happened with me is EVERYTHING I used to believe has changed. I realized I was raised to handle money as if I had a husband, and I don’t. I probably will never co-mingle my finances with anyone. But I have had a very sobering period of examining these attitudes I absorbed about money. I was not prepared to be a single woman my whole adult life. I hate to make a sweeping generalization, but as a female teenager, I was allowed, then encouraged by marketing, to spend money on incredibly stupid, frivolous things. I think it is even worse today, because women are being encouraged to buy $1000 dollar pairs of shoes, when they have nowhere near enough income to support something like that. Like that famous episode of Sex and the City where Carrie Bradshaw realizes she has spend 40 thousand dollars on shoes, and doesn’t have a house. I have a huge amount of remorse at the amount of money I have thrown away in my life. I feel like my generation was completely absorbed in marching lockstep right into the mall and buying whatever the advertisers dictated we had to have. Unlearning this as an adult has been sobering, and tough. I have reprogrammed myself to a great extent. I am now trying to train my brain to look at life from the perspective of someone post-depression era. I am getting ready to take a solar and wind power class. I am trying to buy land for cash and have no mortgage, ever. I am banking on there not being any social security or medicare when I eventually ‘retire’. I am sorry but I do not believe that 401k or stocks are a safe place to put money over long term because the markets are so volatile. I also do not believe in contributing to unseen and unregulated environmental processes, which keeps me from investing in mutual funds. Karmically, I want to know what I am paying for, because I believe at some point I will be held accountable for it. I am still working out the particulars, but in general everything I ever believed about everything has changed, most specifically the inane belief I held that things will always magically get better. They won’t, I am too old to continue believing that old saw. *I* have to get better, and that is the only way any thing will change. Thanks for space to vent a bit.

  • Come on! Don’t spoil the New Year mood. We all only live once and life is short! Spending moment on getting thing you like is KING and no one wants to live in miseries. Saving? What for? Interest is so low now and it can hardly keep up with inflation anyway.

  • The bigger problem is that this same mentality has spilled over into our government as well. Some politicians, like the examples you use, believe that more income, in the form of higher taxes, will cure the problem. We have elected people that know nothing about these very basic principles.

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