When you make more money, you move up into higher income tax brackets. This progressive tax rate has been called a “success tax,” because the more you make, the higher the rate you are taxed. But this isn’t the only success tax, the other one is your increase from lifestyle spending.
When you were age 19, whatever level of quality you were content to own (from socks to cellphone) or consume (from alcohol to shampoo), it ratchets upward as your income increases. The items we buy today serve the same function as their cheaper competition, but we no longer consider purchasing the cheaper versions. This is called “lifestyle inflation” and it consumes an increasing amount of your income. An article by Derek Thompson highlights data indicating that on average, no matter what your level of income, 50% is spent on housing and transportation. So whether you make $40,000 or $400,000, the average American spends the same: half on housing and transportation. (This ratio is similar for Canada and UK as well).
Increasing your financial stability would be greatly advanced if instead, you controlled your lifestyle spending. Not just housing and transportation, but all areas. The average person does not control their spending and many require credit cards to pay for all of their over spending. It is always best if your personal ratios for any spending be FAR below the ratios for the average person (because the average person is always a very-poor money manager).
Let’s examine an item that most of us purchase – shoes.
- Were you content or in utter agony with a cheap pair of shoes when you were age 19?
- Sitting alone at your kitchen table, does it really matter if you have an expensive logo on your shoes?
- Are you able to experience appreciation for a new pair of shoes you just purchased, or do you immediately search for an even better pair to add to your large collection that you rarely use?
- Would you prefer to own a cheaper pair of shoes today or when you are elderly, being forced to wear a cheap pair of shoes when you need a more expensive pair with support and comfort?
- At the end of each month, do you have plenty of money to save and invest or do you increase your credit card balances?
The more perspectives and long-term thinking you can apply to each purchase that you make, you may be better able to distinguish between the proverbial “wants vs. needs” and make better financial choices.
To help control your spending, avoid the usual budget busters:
- Moving to a neighborhood where your income is well below all of your neighbors
- Failing to meal-plan each week out, in advance, and eating out for a much higher price and convenience instead
- Keeping up with the Joneses (whose credit cards are maxed out)
- Trying to impress others with your glamorous Instagram lifestyle
- Routinely spending time at bars or mindless shopping
- Leasing cars or borrowing most of the money for new cars
The best thing you can do for your financial stability is to NOT impose a success tax upon yourself by ratcheting up your lifestyle just as fast as your income grows. In particular, keeping your housing and transportation below 50% of your income.