We live in a society that emphasizes spending and budgeting based on income, but what if this isn’t the best mindset to truly build wealth?
Think about it…
Your credit card limit is based not only on your credit score but on your annual income.
Most budget planners view your mortgage payment as a certain percentage of your monthly take-home pay.
We tend to think in terms of “What can I afford?” rather than “What do I actually want or need?”
Now, I want to be clear that I’m not criticizing our ability to get credit or loans based on income. This system has created opportunities for all of us to get an education, purchase a car, and buy a home despite not being able to pay for those things upfront in cash. However, I do want to emphasize that purchasing things with credit can create a false sense of financial security.
Purchasing based on income can lead to spending like we are wealthy, even if we aren’t.
And the statistics continue to prove this:
- According to CNBC, the average non-medical credit card debt is $8,195, and it would take most Americans 13 months to pay it off.
- An estimated 74% of Americans take vacations they can’t afford, resulting in $1,108 in debt on average, reports Forbes.
- The leading cause of foreclosures is an unexpected change in income.
This is not an argument against wisely using debt (i.e. a mortgage) to live your life. After all, if we can improve our own individual purchasing power to get ahead, why wouldn’t we?
However, what I am advocating for is a mindset shift where we focus on budgeting and spending based on net worth instead of income.
Upgrade from a Budget Mentality Towards A Net Worth Mentality
The finance industry is filled to the brim with budgeting advice. And yes — a balanced budget is the foundation of a healthy financial life, but a balanced budget alone won’t help you get to the next level.
The shortfall of a budget mentality is that it encourages us to focus on increasing income in order to get ahead. Of course, income is important, but it is only part of the equation.
Compare this to a net worth mentality, which motivates us to both boost our income and build wealth through strategic saving and investing.
In other words, while budgets are necessary, we also need to have a larger picture view of our financial goals. When we get too mired in our budget details, it’s easy to fall into the trap of living paycheck to paycheck to survive the next month’s budget.
However, when you have the long-term goal of growing your net worth, then you can get into the habit of saving, investing, and growing your wealth every month.
When we’re children, we’re constantly conditioned to think in terms of income. We believe that people are only rich because of their high incomes. This includes:
- Doctors
- Dentists
- CEOs
- Celebrities
- Professional Athletes
To be fair, there can be a relationship between income and wealth, but at their core, these are two entirely different metrics. As the saying goes: it’s not how much you make; it’s how much you keep. This is true whether you’re making $50,000 or $500,000. Making a six-figure income does not necessarily mean that you’re building your net worth every month.
So how can we move away from spending based on income instead of net worth? Here are some tactics to consider.
Tactic 1: Make Money Personal
One of the reasons it’s easy to spend lavishly based on income is because we embrace a mindset that “money is relative.” We begin comparing ourselves to our parents, our coworkers, and our neighbors.
But the reality is that your financial goals are unique to you. They are personal. They are wholly yours.
Sure, your neighbor might have a nicer car or a bigger house, but chances are that you don’t know the details of their budget. What if they’re spending based on income instead of a net worth mentality? They might look like they have it all, but their bank statement says otherwise.
The most successful people in the world know their financial goals inside and out. They stay focused, they make wise decisions, and they work diligently to get ahead.
Tactic 2: Begin Developing Multiple Streams of Income
What do all the wealthiest people in the world have in common? None of them rely exclusively on a single source of income. In fact, a study by CNBC shows that 65% of self-made millionaires have a minimum of three income streams.
Robert T. Kiyosaki sums it up nicely: “The poor and the middle-class work for money. The rich have money work for them.”
One of the simplest ways to do this is to save money and to invest money. If you have high-interest debt such as credit card debt, then you’ll likely want to prioritize paying off that debt before you earnestly begin investing. Or at least build up an emergency fund in a high interest savings account.
Depending on where you are in life, it might be hard to get a part-time job or even start a side hustle at home. After all, there are kids, home chores, and other errands calling your name.
But whether or not you can develop a stream of income today, be sure to invest in yourself so that you can succeed tomorrow. Always be learning. Always be adapting. Always be growing.
Tactic 3: Keep Your Eyes on the Bigger Picture
Again, I want to emphasize that monthly budgets are important, but I also want to encourage you to begin taking a long-term view of your finances. The primary reason it is so hard to keep our eyes on the bigger picture is because the future always seems fuzzy and amorphous.
So I encourage you to get specific.
Define your long term financial goals for:
- Retirement (what will it look like?)
- Your dream home
- Your children’s education
- Yearly vacations
- Your financial legacy
For some of us, making abstract goals concrete is as simple as creating a vision board. For others, it means writing down your goals on a sticky note and leaving it someplace you’ll see it every day. An unexpected benefit of making your long-term goals concrete is that it will be easier to stick to your planned budget even when distractions pop up.
Final Thoughts
Remember, net worth and income are two different things. Just because you can afford it, doesn’t mean you can spend it.
If you’ve been trying to get ahead but have struggled to do so, I challenge you to embrace this mindset shift for a few months. You can always check out my blog for other tips to achieve your financial goals.
The difference between spending and budgeting based on income vs. net worth might not seem like a big deal, but I promise that this shift in mindset will help you feel more financially independent… and will help you get there, too!
