Some people think a raise in income should automatically equal a raise in their spending. But if our spending always follows our earnings then we would have to change our lifestyle habits every time we change jobs or get salary adjustments. Does this mean Elon Musk, CEO of Tesla Motors, who made $78 million last year should only drink water from Acqua di Cristallo? It’s the world’s most expensive bottled water. Each 750 ml bottle sells for $60,000. Jumpin’ jelly beans 😯 After all, Elon has to find ways to spend his money in order to match his income right? 😛
Thinking about income and expenses on a year by year basis leads to myopia and it’s how many people get stuck living paycheque to paycheque 🙁 They fail to see the longer term picture because they can’t escape their short term cycle of income fueled spending. What they should try to focus on instead is goal oriented spending 🙂
Making money usually gives us the power to spend. In today’s world however, we don’t need incomes to spend anymore. We have credit for that 🙂 Student loans for example, allow people to attend school even if they have no income. It’s okay to spend beyond our means because we’re just stealing money from ourselves in the future, which we can always repay later. This is true for saving money as well, but has the opposite affect. The reason we should unchain our spending habits from our incomes is because how much we spend and save shouldn’t be determined by how much we make. The decision should instead be based on what our future goals are.
A popular rule in personal finance is to live within our means. But what percentage of our incomes should we be saving? Well instead of picking an arbitrary target savings rate, it’s much easier and practical to decide on a long term financial goal and pick a reasonable saving rate based on that 😉 For example, based on how many more years you plan to work, your current portfolio value, and your current salary, you can get a rough idea of what your current savings rate should be. The detailed calculations can be done however you want. The important thing is to understand why you’re saving that amount because if life throws you a curve ball you’ll know how to adjust your savings accordingly 😉
But it’s hard to think differently sometimes when even financial experts are giving confusing advice. Here’s a quote from Canada’s largest bank, RBC Royal Bank’s website about emergency funds.
Most financial experts suggest you have at least three months’ salary in your emergency fund. How much is that for you?
How much is 3 months’ salary for me? The answer is irrelevant for setting up an emergency fund because RBC is assuming my salary is the same as my expenses. No wonder people identify spending with income so closely.
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Random useless fact: Belgium spent $1.15 billion on World War I.
This is something I think of on a regular basis. I don’t live a very lavish lifestyle, and if I wasn’t paying off debt I’d have a lot of surplus. Which means, at some point in the future, I have a lot of money for savings (yes I know I should pay myself first, but you know what I mean).
I am so interested by this water that Musk should be drinking… what is so great about it?
Yup, I know what you mean. The expensive water bottle is very special. Instead of ordinary plastic, the bottle is made from 24 karats worth of solid gold so you can buy it as an investment since the price of gold tends to appreciate over long periods of time. Also, it the bottle was designed by a famous person who has created a line of very high-end Tequila which also sells for ridoodoodiculous amounts of money 🙂 And lastly the water itself is of the purest quality and best tasting in the world. And there is also 5 milligrams of fine gold dust mixed into each bottle of water. If you drink it your body will literally be worth more money lol. I have no idea how well the gold particles will filter through your digestive system though.
This is a strategy I used to effectively pay off my student debt in one year, and to save up for my down payment. The blogger “lesliebeslie” once wrote an article about clothes budgets that contains a similar idea – her point was that by not having a clothes budget, people have already implicitly given themselves the permission to spend that amount on clothes, whether they need it or not, which often leads to overspending and spending money on disposable clothing we don’t need. If you translate that into the overall budgeting context, if we allow ourselves to spend proportionally more every time we got a raise, without a real need for it, this is short sighted and will probably lead to overspending as well. To be fair, I have upgraded my lifestyle as my income have increased – I spend more on eating out, buying more expensive clothes, and spending a bit more on housing, partly due to my changed taste and preferences. But I think what I do is different from a blind decision to spend more simply because you make more, or, decision to spend money for the sake of spending money. I also make sure that… Read more »
The bottle looks like it belongs in an Indiana Jones movie lol 🙂 I can’t think of anyone who would want to buy that except maybe collectors. That’s good you don’t spend more money just for the sake of doing it. I increase my lifestyle expenses over time too. The important thing is we are mindful of how we’re allocating any new income, instead of thinking “where did all my money go?” later on down the road.
At $60k per bottle that better be some damn good water. The key behind the phrase of live within your means is to not spend more than you have to not whether you can afford it or not. If you continually spend 95% of your income, good luck retiring anytime soon.
Sometimes when people make $10,000 more they convince themselves that they deserve to spend an extra $10,000, which is another slippery slope to go down. My stocks increase their dividend payments sometimes, but I don’t think I necessarily deserve to spend the difference. If I did it would diminish my long term compounded returns.
For the last two years, I have allocated my pay raise to add to my payments to my Self Invested Personal Pension (didn’t get pay raises for two years before these). As far as I am concerned, I already have a pretty good standard of living, so extra meals out or more expensive holidays will not make me any happier, however being able to choose what I want to do seven days a week will make me massively happier.
It’s amazing how we get dragged into living up to our pay check instead of being happy with what we already have, I suppose that’s the power of marketing!
I hope you have a short journey to your goal
FI UK
Good for you for contributing to your SIPP and planning ahead. Savings is like investing. We must focus on the long term goal despite the short term fluctuations that we can’t control.