Your Income Isn't the Reason You're Not Saving

I recently read The Lies About Money. I wasn't really wild about the book, but it did have a few tidbits that I felt were worthwhile. One was their take on the income/saving relationship:

Don't blame your income for the fact that you're not saving money. Making more money has nothing to do with it. You earn more than you did ten years ago -- back then, you longed for the money you're complaining about today! It's a common occurrence: A study by the National Bureau of Economic Research shows that high-income households have just as much trouble saving money as low-income households; both groups save pretty much the same amount.

If you think about it, he's right. Imagine yourself a decade ago and what you were making then. Now compare that to what you're making now. It's probably a lot more, isn't it? But you also probably have more expenses too as it seems expenses always rise with income. That's fine, to a degree, but when expesnes rise just as much as income, you're not any better off even though you're making more money. Sure, maybe you're having more "fun", but your net worth isn't climbing any higher.

In the end, it gets back to the same, basic point: the first step in growing your net worth is to spend less than you earn. If you don't do this, you're not going to make any financial progress (at least as far as increasing your net worth goes.)

For more thoughts along this line of thinking, see these posts:

• How to Grow Your Net Worth When You Don't Make a Lot of Money

• It's Still Not What You Make But What You Spend

• How to Get Rich on $20k a Year

• It's Hard to Save Money On Only $250,000 Income

Comments

[Rev]

Hah. I get a kick out of this because my coworkers/friends who are heavily in debt and living paycheck to paycheck all seem to think there is some magic threshold for when you have enough money where you don't get in debt/spend it all. I keep hearing "Once I break 65k it'll all be ok" And that number keeps changing but the statement doesn't.

It is sad though that many of the people I know in their twenties who have a combined income of 100k+ keep racking up debt and are check to check.

[Edmund]

The more you earn, the more you spend.

How stupid is that.

I disagree that you have "more fun" by spending more. I see people buy useless junk all the time.

However, I'm in my mid 20s and save more than 50% of my salary. I can't say I can do the same if I don't make a nice salary. I spend the same now as I did two years ago, when I make a third of what I currently make. I think that's the big difference.

[Kirk]

I had a doctor as a client who made a substantial salary. He enjoyed every penny of it. Unfortunately, this enjoyment did not include saving. When he informed me he was retiring, I told him he couldn't afford to do it unless he drastically reduced his lifestyle (the reason I started this post with the word 'had'). He did it anyway and quickly realized that just because he made big dough didn't mean he live that way in retirement.

So it doesn't matter if you make a pauper's wage or a prince's, you need to save.

Nope, I make less today in real (inflation-adjusted) terms today than I did a decade ago.

[Anitra]

Of course I make more and have more expenses than I did a decade ago... In 1997, I was still in highschool.

My husband and I spend a lot less than we earn... but everything that's left over goes towards our student loans, since we'd like to finish financing our education before we have our own kids in highschool.

[Michael B. Rubin]

"The problem isn't with my spending, it's with my income." If I had a nickel for every time I heard that, well, I'd have a boatload of nickels.

According to a Harris Interactive study conducted last year, 19% of those making $100,000 or more live paycheck to paycheck. I've got no proof, but I'd wager 99% of those never thought they'd still be living that way on such a salary back when they made far less.

You can't grow your income enough to begin to be able to save. Regardless of your income, you must choose to spend less of it.

[Aaron]

I have a question though, over the past 6 years what has the inflation rate and cost of living been? I definitely agree that the only way to save is to live on less than your income BUT adjusted for inflation I dont' believe I make any more than I did 6 years ago. (Arizona, average size house(3 bedroom 2 bath, 1600 sq feet), 2 more kids, 2 more years of grad school). When do you pull the plug and realize you do need ot make more money?

[FMF]

Aaron --

You should be making more than you were six years ago. If you aren't, you've had some unfortunate circumstances hit you, you're not managing your career correctly or you're in a poor-paying field.

[Aaron]

I technically make more now than I did 6 years ago, I've had steady increases of about 5% per year but when I calculated the 4% Cost of Living increase (probably a little conservative) I believe I'm roughly making the same I was 6 years ago.