The Rising Income Trap

Desire is a contract that you make with yourself to be unhappy until you get what you want.

Naval Ravikant

When I was finishing my undergrad (in 2001), I remember thinking a $40,000 salary was a ton of money.

While in school, I made minimal income yet somehow went out on a regular basis. I wasn’t suffering. In fact, that was a great period of time in my life. Still, I imagined the things I could do with a massive $40,000 income.

Soon after graduation, I was earning $42,000. I was rich! Or was I?

Fast forward to today. I couldn’t even imagine how I’d survive on a $42,000 salary.

Today, I earn quite a bit more than I did in 2001. Yet, I fight a constant battle to ensure I don’t fall into the rising income trap.

What do I mean?

Money has a way of vanishing. The more you earn, the more you spend. Expectations rise and you can easily find yourself inadvertently living paycheck to paycheck.

Make a dollar, spend a dollar

People are masters at rationalizing increased spending after their incomes go up:

“I make good money now so…”

“…why not turn the heat up a little higher.”
“…why not move to a bigger house.”
“…why not buy that leather jacket.”
“…why not get that $65,000 car.”

Quickly, all the extra money generated by a higher salary is eaten up by a new set of automatic monthly bills and discretionary expenditures. Some refer to this as ‘lifestyle inflation’.

Don’t let the Lexus fool you!

Despite appearances, many high earners are actually broke. In fact, many high earners live precariously close to the edge of bankruptcy because they are so dependent on their paychecks to cover their massive monthly fixed costs.

The true cost of graduating from a Ford to a Lexus is economic security and financial freedom. Financial freedom is only available to those who have money tucked away in savings accounts, investments, real estate and other assets.

As your pay rises you have the opportunity to use the surplus income to build lasting wealth. In contrast, by spending your surplus you are trapping yourself in a cycle of financial dependency. You are locked into a job you might hate because you need it to make your monthly mortgage payments. This is the rising income trap.

Retail therapy is bad for your financial health

It’s easy to get stuck in the rising income trap. Marketers exploit your primal instincts to desire more and have developed cognitive techniques to make shopping feel therapeutic.

The pressure doesn’t just come from marketers. Your boss wants you to be up to your eyeballs in debt. The less financial freedom you have, the more he or she owns you. Your friends want you to live paycheck to paycheck because they lack self control and feel better knowing everyone else is just as irresponsible. The system is simply built so you live hand-to-mouth in one way or another.

Stop. No matter what your income, I suggest you take a moment to look at all your expenses.

Are you spending to fulfill some unnecessary desire? Do the things you spend money on bring you happiness that lasts beyond a couple days?

The trappings of a consumerist society don’t lead to happiness. Keeping up with the Joneses doesn’t lead to happiness. Owning a bunch of stuff doesn’t lead to happiness.

It’s time to cut the crap from your life and start building some financial security so you can actually do what makes you happy.

When you get your next raise, calculate how much extra after tax dollars you’ll receive each paycheck. Allow yourself to keep 30% as money in your account and increase automatic debt repayments and investment account contributions to soak up the remaining 70%. Call your lender and financial advisor asking them to set this up. If it’s automated there’ll be less temptation to cheat because you’ll never see the money sitting in your account.

Do this for five or ten years (I know that sounds like a long time, but it’ll fly by and future you will thank you) and you’ll get a huge head start in building wealth and attaining financial freedom.

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