{"id":60888,"date":"2022-02-10T15:57:03","date_gmt":"2022-02-10T19:57:03","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=60888"},"modified":"2022-02-21T17:07:32","modified_gmt":"2022-02-21T21:07:32","slug":"spending-more-than-you-earn","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/spending-more-than-you-earn\/","title":{"rendered":"Spending More Than You Earn = A Lifetime of Poverty"},"content":{"rendered":"\n

Do you ever make purchases even though you know they will put you in debt? Do you know how spending more than you earn<\/a> can affect you for years to come?<\/p>\n\n\n\n

In his book The Millionaire Fastlane, <\/em>MJ DeMarco discusses insatiable consumption, or the never-ending desire to spend money. While spending money isn’t fundamentally a bad thing, if you spend more than you earn, you are dooming yourself to a lifetime of poverty.<\/p>\n\n\n\n

Here’s why you should think twice before buying things you don’t need.<\/p>\n\n\n\n\n\n\n\n

Insatiable Consumption<\/strong><\/h2>\n\n\n\n

DeMarco defines the Insatiable Consumption formula for wealth as: job + debt = a lifetime of poverty<\/em>. He argues that insatiable consumers are more motivated by the illusion<\/em> of wealth<\/strong> than actual wealth<\/strong>. According to him, spending more than you earn on luxury items and experiences will make someone feel like they deserve the best without having to work for it. They also crave the pride, admiration, and respect that rich people enjoy, and they believe that they can achieve the same positive feelings simply by looking<\/em> rich. <\/p>\n\n\n\n

(Shortform note: In the same way it creates an illusion of wealth, buying things to impress or outdo others creates an illusion<\/em> of happiness. In The Happiness Hypothesis<\/em><\/a>, Jonathan Haidt explains that the desire to project wealth limits your ability to feel intrinsically<\/em> happy<\/a> because it leads to an endless competitive cycle: You feel happy when you buy something that projects wealth. However, when someone else buys something more expensive, it devalues your purchase and leaves you dissatisfied. The only way you can maintain happiness is to continue purchasing increasingly expensive things so no one outdoes you.) <\/p>\n\n\n\n

Seeking Short-Term Gratification Risks Long-Term Security<\/strong><\/h3>\n\n\n\n

DeMarco explains that this attitude disregards the effort and persistence required to create<\/em> wealth in favor of the quick fix of using credit to impersonate<\/em> wealth. While credit (loans and repayment plans) allows you to spend far more than you earn, it destroys your chances of creating actual <\/em>wealth and freedom. It forces you to work long hours and commit all future income towards debt repayment. This limits your ability to funnel money toward your financial security (pension and savings accounts), forcing you to live paycheck to paycheck. This lifestyle creates financial stress that negatively impacts your health, relationships, and your sense of freedom.<\/p>\n\n\n\n

Further, DeMarco warns that when you don\u2019t have money to spare, you lack control over your finances because you\u2019re at the mercy of external factors: job losses, economic recessions, credit interest hikes, and mortgage inflations. Any one of these factors can destroy your credit rating, further negate your net worth, and bankrupt you.   <\/p>\n\n\n\n

(Shortform note: Financial advisors agree that debts coupled with a lack of savings put you at risk of unforeseen external factors, and they generally recommend that you clear your debts first and then<\/em> allocate money into a savings account. However, large debts may take years to pay off, and without any savings to fall back on, you\u2019ll still be at risk of financial struggle. In The Automatic Millionaire<\/em><\/a>, David Bach suggests that you prioritize saving to best protect yourself from unforeseen circumstances\u2014set aside at least one month\u2019s worth of savings before focusing on clearing your debts. If the worst happens, you\u2019ll avoid getting into further debt because you\u2019ll have savings to rely on.)<\/p>\n\n\n\n

Not All Credit-Users Are the Same<\/strong>

It\u2019s well-known that relying on credit creates debt that restricts financial freedom and has negative consequences in many areas of life. However, DeMarco\u2019s conclusion that people rely on credit because they\u2019re either ignorant of its risks or too vain to care is arguably reductive\u2014many people understand the risks but have no other options. A recent survey revealed that 37% of low-income and middle-income households rely on credit cards to cover basic living expenses<\/a> such as groceries and utilities. 

Further, people who rely on credit tend to work longer hours or take on a second job just to cover their debts and survive\u2014they\u2019re not motivated by the illusion of wealth but by the need to survive. They work much harder than the type of person DeMarco describes in this section.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

Financial Outcome: Poverty<\/strong><\/h4>\n\n\n\n

DeMarco argues that if you buy things you can\u2019t afford without considering the impact this has on your financial security and lifestyle, you\u2019ll never accumulate wealth. This applies even if you earn a high salary\u2014spending more than you earn always leads to poverty<\/strong>.<\/p>\n\n\n\n

How to Avoid Lifestyle Creep: Spend Mindfully<\/strong><\/h3>\n\n\n\n

Even high earners risk spending more than they earn\u2014research shows that the more you earn, the more you\u2019re likely to increase your spending. This is due to a phenomenon called lifestyle creep<\/a>: As your income increases, the more entitled you feel to waste money on things you formerly viewed as unnecessary treats or luxuries. This increase in spending happens incrementally, so it\u2019s often difficult for you to recognize that it\u2019s happening. <\/p>\n\n\n\n

Financial advisors suggest that you can break free of the urge to overspend by becoming conscious of your spending habits and sticking to a budget\u2014common advice includes tracking your spending habits and eliminating all unnecessary expenses. In contrast, Ramit Sethi (I Will Teach You to Be Rich<\/em><\/a>) suggests that if you focus on spending mindfully<\/em><\/a>, you can quit overspending without eliminating expenses that are unnecessary, but bring you joy\u2014for example, if you love indulging in fine wine. To spend mindfully, split your expenses into four areas, decide how much you want to spend in each area, then allocate a portion of your income to each:<\/p>\n\n\n\n