Income does not equal wealth.

This is an important topic, especially for younger professionals. The sooner you learn it, the better! Just because someone earns a lot of money, that does not necessarily mean they are wealthy. Do their earnings have the ability to make them wealthy? That is for sure but that is derived from their habits around saving.

Your earnings are the main driver behind building wealth. Obviously, the more you earn the more you stand to save and invest. That is why I always emphasize that focusing on building a career and growing your earnings can be one of the best investments someone can make.

When you know someone is highly compensated, you can be misled into thinking they are wealthy. Maybe they drive expensive cars, have the latest designer products, or are frequent fine diners. All of these can give the illusion of wealth.

If the highly compensated person can do all of that while still saving money, hats off to them. However, all too often planners see younger professionals begin to constantly increase their lifestyle as their earnings grow without saving or investing.

This phenomenon called lifestyle creep is very real. It is dangerous in two ways. People become accustomed to their lifestyle and they never build good habits around saving. If you are making and spending $100,000 per year after tax, you are building habits. Not necessarily great habits… You are becoming accustomed to that amount of money and if you were to be making less, well, your life would not be the same.

If you are making $65,000 per year and you can save 10% of it, you are living within your means and saving for the future. If we were to plug this into financial planning software, this person would look significantly better off than the person making $100,000. Even if the person making $100,000 per year were to save 6.5% of their income, which works out to the same amount, the person earning less is still better off.

That is all due to lifestyle. The person earning less is accustomed to living on $58,500, while the higher earner would be accustomed to living on $93,500. This is a massive difference in expenses come retirement when the income faucet turns off.

So while it may seem that high earners appear wealthy, that is not necessarily the case. It is all dependent on one’s ability to save and invest which dictates their wealth. Building the habit of saving and investing regularly is incredibly important because when you begin to earn more, you will already be accustomed to stashing some of that money away.

Too many times have planners heard, “Well, I am going to make bank when I hit my peak earning years, I’ll worry about saving when that happens.” While yes, you may be able to save at a fast clip upon reaching those years, if you have not ever built habits around saving, you may have a tough time putting those systems in place and fall victim to severe lifestyle creep.

Take a look back to when you first started working. Are you earning more? Are you saving more or are you spending more? This can really put lifestyle creep into perspective. If you find yourself earning significantly more but your savings are stagnant, that is an indicator of lifestyle creep. Sure, you are earning more but are you that much wealthier?

I’m all for having fun and using your earnings to support a lifestyle that you love but learning how to delay gratification by saving consistently is where true wealth is built. Growing your earnings means nothing if you are unable to save anything.

I’ll close out with one of my favorite quotes, “Money talks, wealth whispers.”

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Have a more specific question or want to get your finances in order? Feel free to reach out to [email protected] for a free consultation!