Spending proportionately to your income or your net worth

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In my recent post summarizing my discretionary spending of 2013, I shared the numbers as a percentage of my gross income for that year. Mostly I did it so my spending would look less horrific, but I also did it because it’s a good way to look at your finances.

Things don’t cost what they are priced.

How much something costs depends on your financial situation.

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how I react to more or less everything now that I am on the strictest budget of all time

If you really want to put things in the context of whether or not you can “afford” them, consider whatever object your heart desires in context of your net worth or income. Regardless of the price tag of an item, it makes a big difference if spending money on it is an almost negligible dent to your bank account or a huge cut out of your life savings.

Think about it:

When I spend $200 on concert tickets as a salaried employee earning $75,000, this splurge represents only 0.27% of my income.

However, if I drop $200 on the same tickets as a starving student earning only $15,000, they now eat up 1.3% of my income.

So maybe in your head you’re thinking, “but that’s still a small amount, it doesn’t matter!”. Ok, but if I go to 10 concerts per year (and I probably will), then it’s only 2.7% of happily employed me’s income but a terrifying 13% of studious me’s income. And that’s about where I can’t afford it anymore.

Most of us can fritter away 1 or 2 or even 5% of our gross income, but once we’re digging into double digits, it’s taking money away from our needs.

Another way to contextualize your spending is to think of it in terms of your net worth. If you’ve built up sizeable financial assets, a little splurge here or there isn’t going to rock the boat. However, if you don’t have anything substantial, or worse yet have a negative net worth, spending anything can make a big difference.

For example, if someone that has $50,000 in savings buys a $50 shirt, they’re only spending 0.1% of their net worth.

If someone else that’s only accumulated $500 buys a $50 shirt, they’re blowing 10% of their net worth. Scary, right?

The point of this is what you can really afford is relative. Blowing 10% of your net worth on a shirt is stupid, you can’t afford that! But going to 10 concerts that cost less than 3% of your income is ok, even if they’re $200 apiece.

The more you earn and the more you save, the more you can safely spend without putting your financial security at risk.

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10 Comments. Leave new

  • Good post!

    I sometimes like to think of things in terms of… I have $250/week to spend on variable expenses. I work 35 hours a week, so for every $7.15 I spend I technically have to work an hour to pay for it. As an example I would have to work about 15 hours to pay for a pair of Lulu yoga pants, makes it easier to decide if it’s worth it.

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    Southbound Savers
    January 10, 2014 11:57 am

    I would say that is a typical example of lifestyle inflation, even though it’s just with small numbers. I have a personal limit of what I’m willing to spend on something and those numbers rarely change for me, even though I now make a lot more money than (for example) during college. Sure, we all have things you spend money on just for fun/pleasure. But looking at it from the perspective of % of income does not sit right with me personally (ie. all different things you “only” spend a small percentages on do add up). I prefer looking at it in absolute terms.

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    • ok GREAT point that didn’t even occur to me.. you are totally right, it absolutely is all about lifestyle inflation — which is why I’m having a lot of trouble adjusting my spending down now that my income is way less.

      I agree that there is such thing as excess even if it represents an almost-negligible percentage of your income.

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      • Hmmm, I’m not sure about this. I think that with a higher income come higher expectations (rightly or wrongly) in some arenas. For example, a lawyer or CEO is expected to wear a higher-quality suit because of the position they’re in. In this case, buying a $3,000 suit is a small percentage of their net worth/income, but in absolute terms is pretty expensive. On the other hand, I’m certainly not expected to wear a $3,000 suit to school because that would be ridiculous given my income.

        In other case, though, there are some lines that can be drawn in the sand. I personally would never spend more than 20K on a car, no matter how much I make, because I think cars are a total waste of money. This is just a personal choice I’d never be able look at from a fresh perspective, even if I won the lottery and money was no object.

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    • I would argue that some lifestyle inflation is acceptable and possibly even necessary. (I’m sure that’s arguable for some people.) But I certainly would not be willing to live my entire life as a college student, in a tiny one-bedroom apartment, eating ramen and mac-n-cheese, driving a beat up old car, never being able to travel or splurge on something special. Part of the process of growing up, getting an education, getting a better job is the ability to better your circumstances and your situation. Moving to a larger house (not a McMansion, but something where you can’t hear your neighbors walking in the morning), driving a car that you don’t worry about breaking down all the time, being able to afford fresh fruit & veg & meat, being able to do something you enjoy once in a while … all of those could be described as “lifestyle inflation”. Or they could be described as bettering yourself. It all depends on your perspective.

      Reply
  • I try to break things down into an hourly rate. It’s a lot easier to weigh whether to get something or not that way. It’s a lot harder to say I deserve something if it takes me a day and a half of work just to earn it vs something that might only take an hour or two.

    Reply
  • We do earn more than before, but we also try not to spend ‘accordingly’. I don’t need a fancier t-shirt just because I earn 5 times as I did in 2008 or over 10 times as I did 10 years ago. It’s easy to get tricked into the ‘lifestyle inflation’, so we are trying not to get into this trap. Sure, when you’re earning a little, overspending on stuff can have disastrous consequences (been there and clearly done that) 🙂

    Reply
  • Hey Bridget, Aside from the financial constraints and lifestyle gear down what has been the biggest challenge (or positive, nice/enjoyable change) about going from working full time to being in school?

    Reply

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