The Hard Truth of Lifestyle Inflation
In a recent TrueNorth Wealth Radio episode, we discussed the impact of Mindset and Habits on your financial outcomes. In our conversation, we discussed that while most people think investment returns and mathematical optimization primarily drive financial success, we’ve found that behavior, mindset, and habits have a much stronger impact on our client’s abilities to reach their financial goals.
As we discussed different mindsets, we came across the idea that you can be broke on any income—no matter how much you make. That’s because of the fundamental fact that your lifestyle can scale endlessly, consistently meeting or exceeding your income. So if you have the mindset that you will just earn more money rather than reign in your spending, it can be difficult or impossible to achieve a secure retirement.
Instead, it’s essential to get the goalpost to stop moving and reign in your spending and lifestyle to reach your retirement and other financial goals. So let’s explore a few tips to go from being poor on any income to rich on any income.
How to Avoid Being Poor on Any Income
Get the Goalpost to Stop Moving
In Morgan Housel’s best-selling book, The Psychology of Money, he attributes much of his family’s financial success to his and his wife’s ability to get the goalpost to stop moving. Housel writes that after they graduated college and progressed in their careers, they maintained the same level of frugality, consciously deciding to drive used vehicles and live in a modest home.
This allows him and his wife incredible freedom over their lives, as their income far exceeds their expenses, creating room to save and invest for the future.
While you don’t have to live like a college student to reach financial independence, you must be aware of your goalpost. As humans, we are hardwired to want more, a psychological phenomenon known as hedonic adaptation causing us to quickly adapt to a certain standard of living and look to what is next. Knowing this about ourselves, we can begin to distinguish between what purchases will improve our lives and align with our values and what purchases are simply the effect of hedonic adaptation.
Live Within Your Means
In its simplest form, your ability to reach your financial goals comes down to income minus expenses. Everything leftover is available to save and invest and becomes the fuel needed to become financially independent. Conversely, if your expenses meet or exceed your income, there is nothing left to save, and you will either stagnate or regress financially.
By deciding to live within your means, you choose to be rich on any income and avoid living paycheck to paycheck no matter your income.
Create a Spending Plan
A spending plan is a tool you can use to live within your means. By having a plan for your money, you decide where it will go every month instead of wondering where it went. At a high level, your spending plan should reflect the things that are important to you, aligning your core values with your money.
For example, if spending time together as a family is essential to you, your spending plan should reflect that, with more money budgeted for family vacations and free time. Remember, everything is a tradeoff for your money—each decision to spend has an opportunity cost attached.
For example, if you buy the biggest home you can afford in the nicest neighborhood, that may mean working extra hours to cover your mortgage, leading to less time with your family. Be aware of the decisions you are making with your money, using your spending plan to outline where each dollar will go and how that will affect your financial goals.
Optimize Your Finances
Last but not least, you can avoid being poor on any income by being more efficient with each dollar. Your money efficiency measures how much money you need to get the outcomes you desire. If you are inefficient with your finances, resulting in poor investment returns, early withdrawal penalties, high fees, and overpaying income taxes, you will need a much higher income to achieve your financial goals.
Alternatively, if you are hyper-efficient with each dollar of income, keeping investment fees low, avoiding early withdrawal penalties, minimizing your tax liability, and earning strong investment returns, you don’t need as much income to achieve the same outcomes.
We’re Here to Help at TrueNorth Wealth
If you’ve been looking for a fee-only financial planner or social security benefits advisor to assist you in becoming more efficient with your money, complete with a customized portfolio to meet your financial goals, then TrueNorth Wealth is here for you.
TrueNorth Wealth is one of the leading Wealth Management firms in Utah and Idaho, with offices in Salt Lake City, Logan, St. George, and Boise. At TrueNorth Wealth, our team focuses on helping all of our clients build a secure financial future while also maximizing the enjoyment they receive from the assets. We do this by partnering each of our clients with a dedicated CFP® professional backed up by our entire staff.
For TrueNorth Wealth, it’s more than just dollars and cents. It’s about serving families across Utah and helping them achieve true financial freedom. To learn more about our services or schedule a no-cost consultation, visit our website at TrueNorth Wealth or call (801) 274-1820.