Earnings vs. income

Lifestyle seems to grow to accommodate the income available. For most people that means that as your paycheck goes up, what you expect to be able to buy or do keeps pace as well, resulting in a new norm that closely matches current earning capability.

Newly middle class people choose middle class cars, houses and name brand clothes. Why is this? Why don’t they stick with the same types of things they had and did before their income grew, often things less extravagant? Why not keep shopping in thrift stores, driving that older car and getting inexpensive haircuts?

Instead of paying off debt, investing or saving, many will choose to commit the extra funds towards purchasing a big ticket item such as an automobile or a house, perhaps one they’d consider more suited to their new position in life. My family fits into this category (though I wish I could say we didn’t).  Somehow, we got along just fine when we had a much lower income. Our house had as much square footage as our current accommodation, at a lower mortgage cost. But then we decided we needed to trade up. We had some legitimate reasons for seeking a new place, and had a lot of housing options available to us that fit our general criterion for size and location. We could have found some something around our same mortgage rate and still have gotten all the major things we wanted.

So why’d we instead choose one that was quite a bit more expensive? Why do most people? Because they can. We saw something and liked it. We could do it, so we did. Hardly rational or long term thinking at work, or at least that’s how it appears in hindsight.  (Though I am very grateful we didn’t borrow as much as the bank was offering to lend us at the time!)

A family of four could choose to live in a three bedroom apartment within walking distance to a park, or alternatively a three-bedroom house with well landscaped yard, both within the same neighborhood and school district. The impact on the number of friends their kids make, what the family eats or hobbies they take up should be minor, but the decision will make a huge difference to their overall financial outlook, especially when considered over the course of a lifetime.

This difference could easily be enough to finance a round-the-world vacation, private school, early retirement, or some other dream. However if asked, most would say they can’t afford those kinds of things, and don’t really feel like they have a choice in the matter.

Most likely their spending has grown to match their earnings, and they don’t see the choices there anymore because they’ve settled in with the new norm. And this shift just seems to happen gradually, without much thought going into the matter.

One thing that keeps getting brought up over and over in conversations about our economy is that less than 1% of the US population controls almost 40% of the country’s wealth.  It’s also often pointed out that the gap between the rich and the poor is widening, not only in America but across the world.  While the poor often struggle to get enough good food to eat, or keep roofs over their heads, those in the middle (and sometimes the top, too) struggle to keep what they’ve got and hold on to their mortgages. But would they still be struggling if they hadn’t extended beyond what they really need? Had they gone for an adequate 1500 square feet instead of an extravagant 4500 would so many still be facing foreclosure?

People elsewhere in the world manage to live on a few dollars a week. So why do we need hundreds or thousands just to pay for our existence? Don’t kid yourself that our quality of life is so much better, or that we’re happier, because it’s simply not true.  If you look at anything that measures global happiness and wellbeing, we’re up there, but nowhere near #1.

In the US we’re obsessed with wealth. We imitate those above us, get jealous of what they have and hope to win the lottery so we can join their club. I’ve decided this is not something I want to care about anymore.

My family is working hard this year to eliminate debt to help further our long term plans, plans that ultimately do not focus on how much money we can earn, or what kind of stuff we can buy, but rather on the experience and enjoyment of life and what we want to do with our time.

Unfortunately, this means that in the short term we have to focus on money more than ever in order to dig ourselves out of this debt as quickly as possible. We’ve made the conscious decision to focus on short term inconvenience for long term gain.

Look for more posts to come on the topic of lifestyle design, a term that basically means taking charge of your life, figuring out what you want it to look like and making it happen. There are a lot of great authors and bloggers out there focusing on this topic, and much of what they say makes a lot of sense to me so far. I’ve just scratched the surface, but I’m eager to learn more. Anyone have any recommendations?

It’s time to make some changes and we’re already on our way.

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This post was copied over from my previous, now defunct blog Unsheeply.

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