Imagine a crisp one dollar bill. What does that one dollar mean to you? How would you spend or save it? Now imagine you are homeless and only have $4 to your name. Now what would that dollar mean to you? Finally, imagine you are a billionaire. What would that dollar mean to you then? Your answers can tell you a lot about your chances of becoming rich.
We have a tendency to think of money as relative. The more money we get, the less value we place on a single dollar. I don’t know where that tendency comes from. Is it human nature or is it our consumer society? Perhaps it doesn’t matter, because the origin of the impulse is less important than what happens if we resist it and view money as absolute.
In this mindset, whether you have one dollar or a billion, a dollar is still a dollar. It can still buy you a cup of coffee, or earn pennies in interest in the bank.
So as we begin to accumulate wealth, whether it’s a few hundred dollars a year or millions from a successful business venture, we have two potential ways to treat additional money that comes into our life:
- We can save and spend the same percentage of money as we always have, or
- We can maintain (or at least cap) our spending on certain things and save a greater and greater percentage of our income
Which do you think will make us richer and build more financial security?
If we choose the first option, we will consistently be buying more and upgrading our house and car to fit our income. If our income is increasing proportionally, we may be able to afford these things but, should our income ever decrease or disappear, living this inflated lifestyle is going to be challenging, if not impossible, to sustain.
If, however, we earn more money but choose to maintain or only moderately increase our prior spending levels, our wealth will grow at an even faster rate.
Editor’s Note: Crazy Dude has done an incredible job hosting this week’s Carnival of Personal Finance. He’s managed to combine nearly 60 personal finance blog posts, including my post about five easy financial resolutions, into a fairy tale. Be sure to check it out!