How Much Do You Make?

In all my years of discussing personal finance, I have yet to come across a person who did not have some money issues at some point in their life; even just figuring out what to do with money when you have it is an issue of its own. Money and what we can buy with it is ultimately the reason billions of people get up in the morning to trade in their labour. Some work hourly, some work on commission, but most people are out there in the world trying to earn a living.

Interestingly enough, if you talk to most people about what would solve their money problems, they unequivocally believe it is as simple as having more money. How much? Just more. More than what they are currently receiving, more than their paycheque currently says they’re worth.

This is worth examining.

Does Money Solve Money Problems?

To understand the root of this reasoning, let us take an intellectual walk down this road by assuming for a moment that money does indeed solve money problems:

In a world where earning more money solves all money problems, those who earn above average income must be doing the best, right? Further, people who earn below average income, it follows, must be doing the worst.

In practice, however, we see that people earning hefty six figure sums do oftentimes struggle with money while some living on half of that, even less than $50,000 per annum, are able to not only get by but even thrive.

What gives?

The reality is that after earning a basic level of income that provides for the necessities of life such as food, shelter, and transportation, everything else is a want. In my experience, it tends to be the wants that sink the financial houses of the majority of people.

In a world where highly paid celebrities and professionals of all varieties still manage to run into money trouble, it is safe to say that the key to financial success is not simply how much one makes.

It’s Not What You Make

Have you ever gone shopping? Have you ever made an impulse purchase? Do you often browse in stores looking for ways to exchange your hard-earned dollars for items someone else made?

The chasm between financially stable and financially crippled is a matter of financial education and self-discipline. Financial success has little to do with what you make once basic needs are met. The key is how much you keep; the amount that falls to your bottom line to be invested.

The way to think about this is in percentage terms. Consider the following straightforward example which ignores taxes and other basic considerations:

If John makes $50,000 per year and is able to live on only 90% of that (investing 10%), he is proportionally living on the same as Alex who makes $100,000 and likewise lives on 90%. John is investing $5,000 per year while Alex is investing $10,000, but they are both moving toward financial freedom at the same rate! Think about it: John will wind up with half of what Alex does assuming everything else is equal, but John also only needs $45,000 to cover all of his annual expenses while Alex needs twice that.

Taking this a step further, if John is able to ramp up his saving even just to 15%, he would be putting away $7,500 per year ($2,500 less than Alex) and moving to financial freedom faster than Alex. While John would be investing less, he also requires less to live on and thus would cross the financial freedom marker quicker.

This simplified example is intended to demonstrate that financial freedom is not defined in absolute dollar amounts. It is completely a factor of how much a person spends which directly relates to how much (or little) they are able to save.

Conclusion

The average person spends a significant amount of time thinking about how much money they make. If they applied the same vigorous approach to minimizing their expenses as they do to increasing their income, they would be better served.

All things equal, the person who spends less reaches financial freedom faster. Keep your expenses low while you scale your income higher to increase the spread between what you live on and what is left over to invest.

Thank you,

– Ryan

Do you spend as much time minimizing expenses as you do increasing income?

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