The Great American Paradox

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By Jacob Maslow

cash in handsDon’t let the title of this article fool you. In fact, the reality is that this paradox applies to all people regardless of whether they live in the United states or not. The paradox is simple: the more money you make, the more money you spend. There seems to be this psychological condition where we instinctively feel that our spending patterns must track our income.

This is OK if your spending pattern is a couple of hundred dollars or a couple of thousand dollars below your monthly income. The problem is when your spending is habitually at the same level or over your monthly income. It is not hard to see where that situation leads. It is no surprise then that Americans’ total credit card debt is at the same level as it was before the great financial crash of 2008. That is a very scary statistic, and this highlights the great American paradox of increasing spending matching increasing debt.

How do you get ahead? How do you build up enough personal capital so you can turn that capital into assets that you won’t have to work actively to generate? Very simple. Live below your means. I know I sound like your grandmother or grandfather, but that is the truth. If you make $5,000 a month after taxes, make it a point to live on $4,000 a month or less. It is doable. You might be rolling your eyes. You might even be thinking I am crazy.

Just think back to when you were in college. Do you remember those days? During those days, you were eating instant noodle, ramen, and macaroni and cheese. Guess what. You were happy. You were content. Now that you have a career and you have your own place, you insist on eating out at a restaurant and living the high life. Not surprisingly, you are in debt.

According to Robert Shiller, the Nobel prize-winning economist, the secret to getting ahead is to learn to live like a student. The good news is that you don’t have to learn it. You have already lived it before. Just get into that same mindset and you will get ahead.

Of course, saving for saving’s sake is not going to cut it. If you just save and you put your money in the bank, inflation is going to destroy the value of your money. That is a waste of time. Instead, save your money so you can invest it. The younger you are, the more risks you should take with your investment portfolio. That is the best way you can increase your net worth.

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