Turning Your Biggest Expenses Into Cash Flow

If you earn a six-figure salary, pat yourself on the back because you are killing it on the income front. Earning $100,000 per year means you earn more than twice what the average American worker earns each year. Earning six-figures would also put you in the top 10% of income earners.

However, 10% of Americans earning a six-figure salary live paycheck to paycheck. That fact can be alarming to many. If people in the top 10% are still living paycheck to paycheck, what chance do I have?

This highlights an important financial truth that few people truly embrace. Your savings rate is more important than your income.

Why Savings Rates Determine Financial Success

Making a lot of money will not make you rich. There is a surprisingly low correlation between income and wealth. Investing a lot of money will make you rich.

Your savings rate refers to how much of your take-home pay (what you net after taxes and deductions) you are saving and investing. The only way to accumulate wealth is to achieve a high savings rate and invest in assets that will provide a solid return on investment over time.

Let’s look at a hypothetical budget of a person with a $100,000 per year salary who is living paycheck to paycheck. For the purposes of this example, I’ll assume this person lives in California

Monthly Income

• Gross Income- $100,000
• After-Tax Income- $70,792
• Monthly Take Home Pay- $5,900
• Monthly Expenses
• Mortgage- $2,542
• Car Payment- $551
• Gas- $250
• Health Insurance- $440
• Student loan payment-$300
• Groceries- $600

• Restaurants- $200
• Utilities- $200
• Cell Phone- $100
• Internet and Cable- $200
• Vacation- $200
• Retirement Savings- $295 (5% of income)

Total Monthly Spendings- $5,878

Total Monthly Surplus- $22

Despite an income of $100,000 per year this person only has $22 left at the end of the month. That does not leave any cushion in case of a financial emergency.

While this person is saving nearly $300 per month for retirement, that puts them at a 5% savings rate (they are saving 5% of their take-home pay). At that rate, they would need to continue working for another 66 years before they would have enough wealth to retire.

Why a high Income does not Guarantee a high Savings Rate

It’s difficult for many to imagine someone making a six-figure salary living paycheck to paycheck. a person making $40,000 per year might think “if I made $100,000, I would save $60,000.”

If that were true, more people would reach financial freedom early on in life (more on that in a minute).

Sadly, many people can’t seem to save any money no matter how much money they make. The reason is that they fall victim to lifestyle inflation.

Many people look at money as a status symbol. They might think “what’s the point of making a lot of money if nobody knows about it?”

Someone who thinks like that is likely to upgrade their lifestyle to match their paycheck every time they get a raise. Put simply, as their income rises so does their cost of living. That’s what we call lifestyle inflation.

Lifestyle inflation is how you end up with a bigger house than you need, a fancy car, expensive vacations and no savings or wealth.

Avoid Lifestyle Inflation

If you want to hold onto your money, build wealth and obtain financial freedom, you need to learn to be happy with the lifestyle you currently live.

Let’s be honest, most of us are not going to make $500,000 plus per year at any point in our lives and that’s fine. You don’t need to make a ton of money to obtain financial freedom.

Here is the simplest way to avoid lifestyle inflation and achieve financial independence:

Step 1: If you’re making $40,000 per year, the first thing you need to do is learn how to be happy living off $40,000 per year.

Step 2: Find a way to make $50,000 per year and remain happy living off $40,000 per year.

Step 3: Find a way to make $80,000 per year and remain happy living off $40,00 per year.

Keep striving to make as much money as you can without increasing your cost of living and you will be able to save more money and build more wealth over the course of your life than you ever thought possible.

Final thoughts

It sounds simple and it is. Make no mistake, just because it’s simple does not mean it will be easy. Avoiding lifestyle inflation is hard. Every time you leave your house or open your phone there is an advertisement in your face trying to persuade you to part with your money.

In my writing, I discuss a lot of the technical details on personal finance. However, today I want to leave you with what I believe to be the most powerful tool to avoid lifestyle inflation.

You need to have a “why”. A reason to take control of your finances and not give in to the temptation of lifestyle inflation.

Next time you are considering buying something you don’t need think of someone you care about that is financially dependent upon you. Think of all the ways you could make that person’s life better if you were financially independent.

Then open your eyes and decide if you still want to buy that thing you probably don’t need.

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions

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I originally published this article in Making of a Millionaire