The following is a contribution from Nell at The Million Dollar Diva. If you’re interested in contributing to Frugal Rules, please consult our guidelines and contact us.
Earning more money seems to be the holy grail of the internet. I mean, no one’s searching Google on how to earn less money, right?
But could earning a lucrative salary make you broke?
I know, you think that’s a crazy idea. I mean if only you earned an extra $20k (or $30k or $100k) a year, all your money problems would be solved. You’d be able to pay off the mortgage faster, pay down all those student loans and invest some serious dollars to eventually retire early.
Yet unfortunately that’s not always how it works. The reality is that as our income grows, so does our budget.
Does Your Budget Grow with Your Income?
Take me, for example. I’m earning way more now than I was in my first job out of college. Yet my savings ability is pretty much the same. And what I’m earning now is actually a pay cut from my previous job where I was earning some serious cash (and seriously wanting to poke my eyes out every Monday). And yet each time my income has changed, my budget has grown or shrunk to match. It’s actually a lot of work to focus on saving the excess, instead of just spending it.
Okay, so maybe that’s not a great example. I mean, my income is pretty average. So what about people on seriously ‘un-average’ salaries? People like doctors, lawyers, and stockbrokers? These people are earning huge salaries and so should have significant equity, right? But instead, what often happens is that people who work hard to gain high paying jobs then feel justified to spend that money on huge houses, expensive holidays and depreciable assets (also known as shiny things).
I recall a client of a firm I worked for who came to us for financial advice – he wanted some help with his retirement planning. The advisor took one look at this guy’s balance sheet and declared before he could do anything else, he needed to make a budget and get his spending under control.
The More Money You Make, the Easier it is to Live Beyond Your Means
This guy was earning $700,000 per year (no that’s not a typo), yet he was carrying $25k in credit card debt. With four kids at private school and a million dollar mortgage, he was struggling and had absolutely no idea where all his money was going.
Think about it, if you’re pulling in $20,000+ each pay check, you’re hardly going to blink an eye when the car needs new tires or the dog has to go the vet. Things that people on average salaries have to save up for a year on more (such as overseas holidays) can be bought with only a moments thought.
But imagine what would happen if he lost his job, or couldn’t work because of illness. What if he couldn’t pay the mortgage and the school fees?
We all know that if you are living right on the limit of what you can afford, then any crisis can quickly escalate. And it’s much easier to crawl out of a $300,000 hole than it is a $2,000,000 one.
The more time I spend working in the financial services industry and reading personal finance blogs, the more I’m convinced that earning more money is not always the key to becoming wealthy. In fact, earning more money could be doing more harm than good.
Rather than focus on increasing income, we should focus on the quality of our spending. Ask yourself, does what you buy improve your life? Does it help you reach your goals faster, or just put them another step out of reach?
And if you are lucky enough to be earning salaries that most of us can only dream of, then don’t waste it on short term wants. Invest it and take charge of your future.
Do you think there is such a thing as making too much money?
Nell is a freelance writer and blogger living in Australia. She writes about personal finance at The Million Dollar Diva. When Nell’s not thinking all things money, you’ll find her at the local coffee shop researching her next overseas trip.
Photo courtesy of: JMR_Photography