Saving is important. Without savings, one cannot even invest. Most of my net worth today is thanks to my special saving method. Actually, there’s nothing special about it, but it works for me. Below is a chart of my after-tax income and spending history over the last 3 years. The difference between my income and expenses, as you can imagine, is what I save and invest. The trick is to increase my income faster than my expenses. The bigger the difference the bigger the savings!
Ignoring my part time job for now, I was making about 35 to 40 thousand gross from my main employer in 2009. Due to tough economic times, I managed to live off about 70% of my take home pay and saved the rest for emergencies. 30% of net income may seem like a big savings rate to some, but according to our government, the average Canadian in my age group (20-24) only made $20K per year or less. After reviewing my needs vs wants, I budgeted my spending in 2009 based on a $25K salary. Because if the average young individual like me is able to live off $20K a year, then there’s no reason why I can’t live off $25K. Since I was actually making more though, I just saved the surplus. If I don’t need the extra money right now, it’s probably best to invest it so I can spend it in the future on something important. However since 2009, my expenses have gone a bit.
Career changes, marriage, moving, increased social status, and starting a family are great reasons for lifestyle inflation, but none of those things have happened to me yet. I support lifestyle inflation when it adds value to our lives, but simply making more money shouldn’t be an automatic signal to increase spending. Sometimes we need to step back, and look at the world from a wider perspective to understand the bigger picture. Many “assume” that most people’s cellphones are smart phones today because you see them everywhere. But studies show the adoption rate is only 30% world wide, and maybe closer to 50% in US and Canada. It only seems like everyone has a smart phone because people with old cell phones like me don’t use ours as much in public, (^_^;). When I step back I also realize that my friends are not “average” because they earn and spend more than the typical working class citizen.
If we zoom out further and look at my situation from a global perspective, do I really have the right to complain about being underpaid when I have friends and relatives from over seas working longer hours than me but making just a fraction of my pay? Billions of people make less than $2 a day and have to grow their own food. I’m fortunate to have won the geographical lottery and live in Canada. That was pure luck and had nothing to do with my own decisions. But if I have a home, a car, internet, cellphone, clean water, delicious local eatery, and the freedom to pursue happiness, then I think my lifestyle is already pretty extravagant relative to most people in the world. Even compared to other Canadians, I have a pretty average life, and there’s nothing wrong with being average right?
And that’s my saving strategy, basically just a reflection of the points below. It’s not a secret, just a simple mind set to follow. There’s no right or wrong to justifying a purchase, but your perspective makes it so.
- Spending habits should be dictated by one’s values, not income. If people spend too much, they should tweak your values.
- Don’t give in to lifestyle inflation unless it’s for the right reasons (which will be different for everyone)
- View situations from different perspectives and only buy things that will add the appropriate value to your life.
- Look at the bigger picture and understand where your lifestyle fits nationally, and globally