It’s never about how much you make but how much you keep. There’s been a plethora of instances where lottery winners, professional sports players, and celebrities who’ve earned an obscene amount of money have gone bankrupt and broke. I’m not talking about lottery winners with a 6 figure winnings, I’m talking about people who’ve won/made 7 – 8 figures worth of money. How do they go bankrupt?!
Saving Makes Money, Not Salary
I earn 5 figures a year from my job. It’s hard for me to look for ways to spend my after-tax money because I’m content with just buying stuff that is necessary. Yet when I hear of stories of people getting/making millions of dollars and they go broke, It makes me want to question where their money ended up.
This highlights an important distinction between salary and net worth. In college, my friends were obsessed about people’s salary and internship offers (which I most of the times avoided answering). Then when a comparison happened, the one who made more would always feel superior or feel like they are doing better in life, are smarter, or any other thing that makes them feel like they are better.
While it’s all well and good to talk about salary, they never understood that the one who makes more is not that one who keeps more. None of my friends would ever ask what someone’s net income is, but only salary. This I think brought a common misconception that salary is the most important thing when it comes to personal finance.
Allocate Funds that Give the Highest Utility
I don’t get a lot of joy from buying material things. My budget covers everything I need to live plus a miscellaneous budget to go out plus a hefty savings amount. I don’t understand how people spend money like there’s no tomorrow because there will be a tomorrow.
Larry Ellison famously said “at some point, you can’t spend all of it. Trust me, I’ve tried” during a graduation speech. Granted, he spent a lot of money on things that he doesn’t need, in my opinion, such as multiple cars, airplanes, and an island called Lanai. Even after spending an obscene amount of money on things he doesn’t need, he admits that he can’t spend all of it.
Finding things that add joy to your life over the long-term is hard. This is why I have a hard time finding ways to spend money because I’m very selective on the things that I purchase. Most of the times, I have to be more than convinced that my purchase will add value over the long-term.
Of course, that’s not to say I don’t buy things that provide a short-term utility. But the important thing is that I am conscious in recognizing that when I’m making a purchasing decision.
Spending money on things that add little or temporary utility to your life is easy. Going out to bars, eating out, buying the newest car, leaving the lights on while out, etc. are all examples. America brilliantly markets the idea that material possession is the best way of living. This probably pumped up the economy and made money flow through the economy more.
Countries in Asia’s average savings rate can be as high as 33%+. in America, it is seen as “good” if savings rate is 10% or so. The difference, in my opinion, is probably in the marketing to consumers.
What’s Normal to You?
It’s about training yourself to the point where saving money becomes the norm and instead of spending becoming the norm. I’ve consistently saved to the point where I feel out of place if I don’t save. My friends see me as out of place since I save so much but the important thing is that I feel normal to myself, not to others.
If you want to better your financial life, figure out a plan on where you want to be 1 year from now. One thing to remember is that sitting down and taking the time trying to come up with a plan is going to take time. Maybe a few hours depending on your situation and how thorough you want your plan to be.
Then give yourself a month to follow it. Maybe you’ll stick with it 5, 10, 15, 25, 30 days out of the month. This is not failing even though you’ve only completed 5 days out of 30 days. 5 is still far better than 0 and that’s how you should look at it. Then the next month, complete it 6, 7, 10, or any other number higher than 5 days and you will be on your way to create a habit out of it.
Readers, do you focus more on how much you make and how much you keep? Do you know anyone who makes a lot but misuses the money a lot? Let me know in the comments below!
My goal is to enable your success in personal finance so that you can realize the American dream. The first step is starting today!
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