As a society we’ve been conditioned to chase higher income.
- Employers love it – as long as people follow this religiously, it makes it is straight forward for firms to recruit and retain talent.
- Employees love it – in addition to the illusion of hikes ,which are often nothing more than yearly inflation adjustments, there is now a prospect of real growth relative to society.
- Governments love it – their tax revenues are going up.
- Banks love it – Lifestyle inflation and keeping up with Joneses syndrome ensures that higher income is automatically translated to as higher spending and economic activity.
- Corporations love it – they can now increase their price of goods, right?
Everyone seems to love it, so where is the problem? It is a problem depending on what you wish to do with your life – move from place A to B or run faster on a treadmill at the same place.
Chasing higher income has moved you on to a higher gear/speed on a treadmill but has it moved you closer to your destination? All you may have done is started running faster, increased your costs through life style inflation and may now need to earn more just to sustain your lifestyle. In US media we often come across instances of families earning $200k+ in New York and being a few pay checks away from bankruptcy if they stopped working.
The simple alternative? Chasing higher savings! (even if Bernake keeps interest rates close to zero!) This is a more pragmatic approach to wealth creation, ie. moving from place A to B. It helps to have a higher income, but that is a means rather than the end! The trick to wealth is to reach an optimal mix of higher earnings and lower lifestyle costs which results in the largest savings (and thus investments) that is sustainable over a large time frame.
It doesn’t matter what you earn, what matters is what you bank!