Making a high income mean high reward

Though a higher income means more money, it often means more expenses. Hamm breaks down how to curb spending so an increased paycheck actually means more money in the bank.

I receive emails quite regularly from people who are making well over $100,000 per year and yet are struggling to make ends meet. It doesn’t take much poking around on other personal finance websites to see that same story repeated many times over.

For a long time, I struggled to understand why this was happening. When Sarah and I were truly struggling with our finances, our combined income was substantially below $100,000 per year. I would simply think to myself that if our income were doubled back in our overspending days, we would have had plenty of resources to keep things afloat.

Here’s the problem: that daydream simply isn’t reality.

If I’m honest with myself about what we would have done with doubled income back then, the real picture would have involved a larger apartment, nicer cars, more gadgets, and more meals eaten out on the town.

It’s a nice fantasy to pretend that I would have had more financial success with a higher income, but it’s just that – a fantasy.

The truth is that unless you’re paying attention, your spending can quickly expand to fill up your income – and sometimes more. As those spending choices become routine, it is really easy to become blinded to their real impact on your situation, especially when the individual purchases appear to be small ones.

So what can you do if you’re making six figures and you’re still struggling to survive?

First, put a firm monthly cap on your non-essential spending. You have to pay the bills, obviously, and you have to put food in the fridge and gas in the tank, but almost all of your spending beyond that is non-essential. For the next month, put a tight cap on that spending.

For example, at the start of the month, simply say, “I’m spending only $500 this month on non-essential items.” That money must cover eating out, entertainment expenses, concert tickets, books, video games – whatever it is that you buy each month. If you have regular bills that are purely for entertainment purposes, such as a Netflix account or a World of Warcraft subscription, those bills come out of that $500.

Do that for one month. During that month, you’re going to have to make some choices about what’s actually important to you and what’s not really important. You’ll have to decide whether to spend $50 on a nice meal at a restaurant or use it for a concert ticket. Even more important, you’ll likely find yourself near the bottom of that stack of money before the end of the month, meaning that you’ll have to figure out how to stretch that last $20 over the last week of the month.

It is really easy to not realize that you’re spending money on something non-essential and not include that expense in your $500 limit. Be conscious of what you’re trying to do and keep an eye on every single purchase.

Those are valuable things to figure out. They are the core of budgeting, and budgeting, in whatever form people use, is really the key to controlling your spending.

Anyway, at the end of that month, you’re going to likely have some significant left-over cash. Use that cash to start an emergency fund. You should strive to have a month’s worth of living expenses (at least) in a savings account at all times so that if an emergency strikes, you can survive for a while. Many people eventually strive to have several months of emergency expenses.

Some people find the first month of “capped” non-essential spending very difficult. Others find it relatively easy. For some, tools such as Mint can help make this process easier than it might otherwise be.

Either way, the important thing to keep in mind is that it’s all about making better decisions. What you’re trying to do is reassess all of those little spending decisions that you make along the natural course of your life and ask yourself whether or not they’re really worthwhile. Some of them are worthwhile. Others don’t add enough to your life to make up for the reduction in savings or debt repayment.

Everyone’s life is different. The things you think are important enough to keep spending money on are likely to be different than what I would choose.

The big thing we have in common, though, is that some of our spending choices are more important to us than others. Figuring out which ones are less important and discarding them is, in my opinion, the most important step people with a high income who are struggling to make ends meet need to take.

The post High Income, But Living Paycheck to Paycheck appeared first on The Simple Dollar.