Spending Habits Are More Important Than Earning Habits
According to the U.S. Census Bureau, the average household income was $34,376 in 1995 & $73,298 in 2014. If you earn the average amount during your life for Americans you should be able to have a great retirement. Why is it that some people who earn the average throughout their life will have a great retirement & others earning similar amounts won’t?
Of course, there are many factors that cause the disparity in retirement savings. This article will focus on only one of those factors. The truth is that most people spend parallel to their earnings. If you fit into that category then you are stifling your wealth potential. With every raise, people tend to equally increase their spending. Why is that so bad?
Spending Habits Are More Important Than Earning Habits
Let me show you why by using a graph but first I’ll explain the graph.
Jane vs Tom
For this example, there are two people (Jane & Tom) who earn the exact same amount during their working years. They both work for 45 years starting out at $30,000 & average a 5% raise every year. Jane’s first year working she doesn’t save anything but she decides that she will start saving after each raise. She decides that whenever she gets a raise (which is 5% annually in this example) that she will increase her spending by 4% from the previous year & put the rest towards savings.
At the end of Jane’s working career, she has saved $1,160,122.91. Note that this is the actual dollar amount she has saved. No interest was earned on that amount. Imagine if her savings were invested over the years how much more that could have grown to.
Tom’s first year he saves 5% of his income. He makes a goal to always save 5% of whatever he makes. This is what I call the SIP (Spending Income Parallel) approach. This is how most people live. They increase their spending to match their income. This is not the best way.
After 45 years working Tom has saved up $239,550.23 or one fifth the amount Jane saved. That is $920,572.68 less than Jane. I do think that saving as much as Tom should still be applauded. Especially if that was being invested over the years.
Look at the graph below that displays Jane & Tom’s earnings, spendings & savings.
At the end of this post you can see the data used for this graph.
Spending Habits Need To Be Your Financial Foundation
You can see here why learning to control your spending habits is so vital to your wealth building strategy. Just because you plan on making lots of money over the course of your life does not mean that you will build up wealth. There are far too many people in the habit of spending everything they make. They continue to say “when I just make a little bit more then I’ll start saving.” When they do make a little bit more once again, they say the same thing. They end up never getting around to saving more.
It’s important to make healthy spending habits the foundation of your personal wealth building strategy. If you wait until you’re making lots of money to reign in your spending it will be much harder & it might even be too late. If you have great control over your spending then as your income increases, your wealth will grow exponentially.
Don’t put off saving until you start making tons of money. Get a handle on your spending. Do your best to increase your income quicker than you increase your spending. As you combine the forces of slowly spending more while quickly earning more you will be amazed at how rapidly your wealth with grow.
Thanks for reading. I’d love to hear about your saving strategy.
Data used for the graph
