The reason why most people aren’t wealthy.

When I was a student, I had very little money to live on. My only income came from a part time job in a bakery and some student loan payments. However I still managed to live pretty well. I had housing, transport, food, a good social life and a great education including all the very expensive books I had to buy!

So, if on a tiny student income I could live quite well, why is it that now I have a far higher monthly income, I am not able to save most of it and become super wealthy?

Well apart from regular inflation (which is a subject for another post) there is something else that will eat up the extra earnings you gain over the years and is why most people don’t become rich.

And that is ‘Lifestyle inflation’.

Put simply, as we earn more money over our careers and lifetime, the cost of funding our chosen lifestyles generally increases too. Bigger mortgages, bigger car payments, more holidays. Meaning despite the extra money coming in from pay rises, bonuses etc, there is still very little surplus income to save.

Comparing my student days to now is a good example of this. As I had very little money back then, my housing was a really tiny bedroom in a shared student house. My transport was a second hand bike I picked up from the local paper. Food was all savers/value ranges and an extravagant night out consisted of a bottle of Lambrini (who remembers that!) and a takeaway kebab.

Once I left university and started working and earning more, my lifestyle started costing more. The room became my own property, the transport became a next to new car and social life became expensive meals out and weekends away.

Now I’m not saying I could live like a student for the rest of my life, far from it! I consciously made that choice to increase my lifestyle with the increase in salary and I get lots of pleasure from nice holidays and a decent car. However, I got to a point where I could have increased further with a bigger house, a newer car, more exotic holidays, but decided more is not necessarily the answer. So instead of those extra purchases and expenses, I decided to use further pay increases to pay myself first and build a freedom fund.

I’m not sure many people have this realisation though. They earn more money but the lifestyle inflation (or lifestyle creep as its sometimes known) keeps on inflating. There is never much spare at the end of the month to put away for the future self and to grow wealth because we never reach ‘enough’.

I don’t want to say one way is right or wrong, everyone is different and has different priorities and goals. But its good to have that awareness so you can make a conscious decision rather than just unconsciously doing what everyone else does.

So maybe one evening, get out that bottle of Lambrini, grab a kebab and start thinking about what you really want to spend that extra income on. A bigger and better car or an earlier retirement? The choice is yours.