Wealth Is What You Don't Spend

The same as we do with obesity.

Financial wellbeing can't be measured by merely looking at how much you earn. The gap between what you earn and how much you avoid offsetting those earnings is the figure that matters most.

And even though the majority of Americans earn more today than ever before, it might not feel that way because the gains have been offset with higher spending.

To generalize only a little: In the 1950s camping was an acceptable vacation. Hand-me-downs were acceptable clothes. A 983 square foot house was an acceptable size. Kids sharing a room was an acceptable arrangement. A tire swing was acceptable entertainment. Few of those things are acceptable baselines for most households today. The average new home now has more bathrooms than occupants.

But all savings relies on the ability to receive an extra dollar and say, "I could spend this, and spending is awesome, but I'm not going to." It's the same as turning down a big meal after exercising. And it's just as hard.

It might seem obvious that savings is your ability to reject what you could spend. But the majority of financial goals are about earning more - better investment returns and a higher-paying career. There's nothing wrong with that. Earning more is wonderful, just like exercise. We just shouldn't lose sight of the fact that earning more will do little for building wealth if every extra dollar is offset by a dollar of new spending.

The world is filled with the financial equivalent of athletes who finish every workout with four Big Macs. Wealth, at every income level, has less to do with your gains and more to do with your ability to leave gains alone without cashing them in.

Three points stick out here.

Learning to contently live with less has the same effect as growing your income , but it's often easier and more in your control. This is an opportunity for financial advisors to add value, though it has more to do with psychology than finance.

Money is often a negative art . It has a lot to do with the actions you don't take and things you avoid.

Everything has a price , and prices aren't always clear. The price of exercise isn't just the workout; it's avoiding the post-workout appetite. Same in finance. The price of building wealth isn't just the trouble of earning money; it's avoiding the post-earnings urge to spend what you've accumulated.