Tan Ooi Boon wrote a wonderful article on The Straits Times about how high-income earners may be in the problematic position of having low wealth.
The key idea is that these high-income earners face serious issues. Tan cited a survey where one in five Americans earning six-figure annual incomes lived from pay cheque to pay cheque. Closer to home, the top three debtors who sought help from Credit Counseling Singapore earned more than $30,000 a month.
Why does this paradox of having a high income, but low wealth, happen? This is because income and wealth are often confused. Think of a bathtub. Income is the water spewing from the tap. Water exiting the drain hole represents your expenses. And the amount of water in the tub represents your wealth. We all want the water in the tub to grow over time, but this can only happen if the water flowing out is less than that flowing in.
Income is a stream. So are expenses. As long as your income stream exceeds your expenses stream, you have taken the most critical step. Your wealth on the other hand is like a lake. It is the collection and retention of all the income that is not streamed out.
While Tan focuses on how people manage their wealth, I believe that there is an even more critical step, which is to manage your expenses, or more accurately, your beliefs about expenses. Three lies stand in the way:
1. You “deserve” it.
Let's face it. We live hard lives. Work is hard, and in a knowledge economy, it also often means that the higher your income, the higher your utilisation of brain power. And mental strength is just like a muscle - often, when you exercise it, you get tired. And in an exhausted state, it is not uncommon to start thinking, I deserve a better house. I deserve a better car. I deserve a better ___________. A three-room condo in the Outside Central Region? With that pay raise, you can afford, no you deserve, that condo in the Rest of Central Region. The BMW 3 series looks a tad tired, perhaps a 5 series is now more appropriate. And just like that, what we term “lifestyle inflation” creeps in. Because we justify to ourselves, that we work hard, earn a bit more, and therefore deserve a better life.
Don’t misunderstand - I’m all for improving our lives and doing a bit better for our families. However, we need to be cautious and ensure that our expenses must ALWAYS be lower than our income. And while it's always easier to upgrade, it's far harder to downgrade. In an ideal world, you’d be watching out for your LIFETIME income compared to your LIFETIME expenses. And for most of us, our LIFETIME income stream is a lot shorter. Most of us will retire. We will stop working and that income tap will switch off. Even if it doesn’t, our income stream is likely to slow down to a trickle.
Plan for your upgrades. Set aside money for fun. Budget for trips in advance, and set aside money to spend. Recklessly. Yes, recklessly. Because you have saved what you needed, you don’t need to save more.
You deserve it. Yes. But you don’t deserve to spiral into debt.
2. Live “within” your means.
This is a classic TBU: True But Useless idea. If you earned $10,000 but spent $9,999, you are living within your means. In fact, you did one better; you saved $1. But of course, all of us know the ridiculous nature of that idea.
Yet, that's how most of us actually live our lives. We are happy if we clear our credit card debts, and if our bank balances look similar to last month’s. We don’t track our true assets and we get by. Living within our means is a good idea, but what we need is the inflow to exceed the outflow by a sizable amount.
Ideally, we need to live WELL within our means. Because life happens. We need to make sure that if we need to fill in a sudden expense, it is always better to dig into our savings than to borrow from others. That means we need to have available cash. That means that when we have good times (and good times here mean normal days), we should squirrel away more.
Live within your means. Yes. But you should strive to live WELL within your means. Can we achieve that? Yes! At the end of the article, I will share a bit about how we can do so.
3. Praying for windfalls.
Some people think they will make it rich through 4D, sudden windfalls, or inheritance. In a population, there will be some dark horses that become wealthy in that way. But they are the exception to the rule. It is best to assume, when it comes to blessings, to always assume you are the rule rather than the exception.
But even if you are part of the exception, take heed! Tan brings out that wealth does not necessarily imply financial intelligence. Wealthy people, who earned their success through hard work, might not have the same savviness for managing their own money. And think about it. Learning anything requires you to spend time unlearning, relearning and learning to master. And managing your own money has the same requirements: you need to unlearn half-truths, relearn real principles and learn fresh ideas. And with money, ideas change. Today, fixed deposits and SSBs are de-rigueur strategies; as early as 2022 Jan these ideas were also-rans.
Managing income and wealth is a critical skill, but it is not an easy skill to pick up. It is a dynamic field and needs to be bespoke to suit your situation.
So what can we do? Are we doomed to a life cycle of debt? No, I believe we can break out of it!
Unlearn some lies. You must afford what you think you deserve. Live well within your means. And even if windfall comes, can you manage it? We cannot control our income. Even if you are employed, incomes can fluctuate (you can get retrenched!). Expenses are a difficult (but important) monster to tame; our brain is a muscle but forcing it to calculate every dollar spent will drain its strength.
Relearn how to save. Every basic financial planning course will teach you it is best to take your income and set aside money first (Save, save, save!). Save money for your goals (retirement, upgrading of lifestyle, education, etc). Set aside more money than you need, and then spend the rest. It is much easier to know you can spend all your money in the spending account than it is to have to manage every dollar that flows out.
Learn an easier habit. The fastest, easiest, and most sustainable way I found is having two separate bank accounts. The first is my savings account. Each month, when my pay comes, I set aside into the first account:
My targeted savings amount,
My fixed expenses such as mobile phone, insurance, child care, etc.
This account I track closely, and it should grow from month to month.
The other account I leave for my discretionary spending (day-to-day, make-up presents for forgetting valentine's day, etc.). This account is simply tracked to make sure it doesn’t fall to 0. By doing this, my savings have been fixed, and my expenses will likely be controlled. At the start, for sure this is a difficult habit to get into but once it is done, life gets easier.
We are living in more exciting times, we are blessed with more resources, wealth, and information. Yet if we don’t change our habits and our decisions, we will forever be tied to chains of debt, or our future unknowable income. Make a vote today, towards the person you want to be.
I write on topics related to financial habits and decisions. Check out my other articles at https://www.williamseah.com/blog. Drop me an email at reach.william@gmail.com or text me at 9673 1523 if you’d like to chat.