How Live in Luxury AND Save Money

Dear Rich Lifer,

I read a story last year about a New York City couple making $500,000 a year, yet they were still living paycheck-to-paycheck.

The couple were in their mid-thirties, both lawyers, making $250K each per year, with two young children.

What was shocking about the story was the financial breakdown of their budget.

Even though they both maxed out their 401(k) plans each year and were working on paying off student loan debt, they were still left with only $7,300 at the end of the year.

Between their fixed costs, childcare, and discretionary expenses (3 vacations per year), this “upper-class” family was just scraping by.

If I remember correctly, the article went on to list other examples of high-earners, making more than six figures, all living paycheck-to-paycheck.

The point of the story was to illustrate just how difficult it can be to avoid lifestyle inflation.

I don’t expect you to feel bad for these people, but I can understand where they’re coming from.

Something I’ve found helpful over the years to avoid this kind of situation myself is a simple rule of thumb.

As so many of us are making New Year’s resolutions, I want to share this tip with you to help with your finances in the coming year.

The 10% Rule

I picked this up talking to a doctor friend of mine at a party. My friend called it the 10% rule and said a lot of physicians he knows follow it.

Intrigued, I asked my friend to explain the rule. He said that for every bump in pay, bonus, or unexpected money you receive: 10% of the money goes towards lifestyle creep and the other 90% goes towards building wealth.

According to my friend, a lot of doctors making good money (think: $250,000 – $500,000 per year) live paycheck-to-paycheck.

What typically happens, he says, is they spend ten years living off 1/5th of their normal salary while they’re in med school doing their residency.

By the time they finish training and start making their real wage, the thought process becomes “I deserve this! I’ve sacrificed the last 10 years of my life…”

…Then they go buy a big house, fancy car, and so on.

I wanted to know why 10% was an acceptable amount? After all, if you ask any of the financial pundits, they’ll tell you zero is what you should aim for when it comes to lifestyle creep.

But the physicians’ rationale is that wealth without wellness is no good.

The heart wants what the heart wants, so instead of depriving yourself of everything, or at least trying to, you give in a little and feed your natural tendency toward lifestyle creep.

And because you’re saving and investing the other 90%, it’s a reasonable compromise that most high-earning household budgets can handle.

Nice Theory, but is it Practical?

At first, I wasn’t totally convinced. Ten percent seemed like a steep amount to allow yourself to splurge, guilt-free. But after talking through it some more with my friend, I was a believer.

My friend told me how he recently applied the 10% rule in his own life. He said that his take-home pay had increased by around $10,000 per month a few months back, so he allowed himself an increase of $1,000 per month in changes (lifestyle creep).

He bought a country club membership and financed a new car with the extra one grand per month. The car was something he always wanted and the golf membership was an activity he enjoyed and could do with his two boys.

Before you shake your head thinking this was a foolish decision, let me tell you what he did with the other 90%.

In less than two years, he paid down close to $200,000 in student loan debt and managed to increase his family’s net worth by close to $300,000.

Have Your Cake and Eat it Too

The beauty of the 10% rule is it’s simplicity. You don’t have to get caught up in the minutiae of calculating every single new purchase to ensure your budget can handle it.

When you get a raise, bonus, or someone hands you unexpected cash, you’re allowed to spend up to 10% of it how you please so long as you save or invest the other 90% responsibly.

Building this kind of freedom into your budget allows you to enjoy life without feeling like a miser. You avoid lifestyle creep so you don’t go down a path where you become like all the other high-earners, living paycheck-to-paycheck.

Follow the 10% rule and you won’t have to keep up with the Joneses, because the truth is the Joneses are probably broke.

To a richer life,

Nilus Mattive

Nilus Mattive

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Nilus Mattive

Nilus is the editor for the daily e-letter The Rich Life Roadmap and a Paradigm Press analyst.

Nilus began his professional career at Jono Steinberg’s Individual Investor Group, where he published his original research through a regular investment column. Later, he worked for a private equity business and spent five years editing Standard and Poor’s...

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