Even among six-figure earners, building wealth is often difficult. In today’s episode, I’m sharing the #1 secret to building wealth, no matter your income.
Lightly edited transcript appears after the show notes.
Topics we explore
- what the secret to building wealth is
- an example of how it works
- how you can apply it in your own life
Resources mentioned
Lifestyle Freedom Starter Guide: https://www.rhothomas.com/start
Study – 78% of Americans live paycheck-to-paycheck: http://press.careerbuilder.com/2017-08-24-Living-Paycheck-to-Paycheck-is-a-Way-of-Life-for-Majority-of-U-S-Workers-According-to-New-CareerBuilder-Survey
Study – 25% of households making $150k or more live paycheck-to-paycheck: https://www.fa-mag.com/news/nielsen–even-many-high-earners-live-paycheck-to-paycheck-22704.html
Report – almost 40% of Americans would struggle to cover an unexpected $400 expense: https://www.federalreserve.gov/publications/files/2018-report-economic-well-being-us-households-201905.pdf
Paula Pant: https://www.affordanything.com
Work with me
Schedule a one-hour strategy session at https://www.rhothomas.com/coaching
Connect with me
The Wealthyesque Community: https://www.rhothomas.com/community
Social media: Instagram, Facebook, Twitter, and LinkedIn
Email: hello@rhothomas.com
Lightly Edited Transcript
Hey friend! Welcome back to another episode of Wealthyesque.
I am so excited that you are here, and I know how busy we all are, especially at this time, so I am super grateful that you take a little bit of time out of your day to spend with me.
Before we jump into today’s episode, I just want to let you know that if you’re struggling with your money; if you don’t know what to do with your budget; you can’t make progress on your student loans; you’re not sure how you’re going to pay for the holidays that are coming up…
I’m a personal finance coach, and I can help you, so if that’s you, be sure to head to rhothomas.com/coaching, and we can get a strategy session on the books.
So getting into today’s episode, I am really excited to talk to you about the secret to building wealth. A lot of times we think we have to win the lottery or get an inheritance or invent something to be wealthy.
And of course, we’re talking about monetary wealth here because we know that true wealth is having control of your time, right?
But even for six figure earners, building wealth often seems unattainable. So today, I’m sharing the #1 secret to building wealth and how anyone can do it. It has helped my husband and me increase our net worth by hundreds of thousands of dollars over the last few years.
So we’re going to talk about what the secret is. We’ll go through an example of how it works, how powerful it is. And we’ll talk about how you can apply it in your own life.
The secret to building wealth
What is the secret to building wealth? It’s as simple as minding the gap. And you might be saying, “Rho, what are you talking about?”
If you’ve ever been to London, on the tube, the underground train, there is this constant refrain, “Mind the Gap. Mind the Gap.” And they’re talking about the gap between the train and the platform.
But we have adopted that in the personal finance space to talk about the gap between your income and expenses. It’s a cute way to talk about making sure that you have something left over from your income that you’re not spending everything.
And when you’re trying to build wealth, you want that gap to be as large as possible. The gap is where wealth is built.
It doesn’t matter how much income you make. If there’s no gap between your income and expenses, then you won’t be able to build wealth.
And for many Americans, that gap is tiny, if it exists at all. 78% of Americans live paycheck to paycheck. I know I’ve quoted that statistic on here before. 25% of households bringing in $150,000 or more are also living paycheck to paycheck. And almost 40% of Americans would struggle to cover an unexpected $400 expense.
Those statistics are really startling, especially when we’re talking about people who make six figures and beyond.
So what are some reasons for that when we’re talking about the six figure earners? The first one I think, is lifestyle inflation.
A lot of times we want to keep up with our friends and our family and our coworkers. We see, they’re making about the same amount as me, you know, if they’re doing these things, then I can do them too.
And I love a quote from Paula Pant. She’s another podcaster, and she says, “You can afford anything, but you can’t afford everything.”
And that is so key. Because I think a lot of times, especially when you’ve got a lot of money coming in, you’ve got this appearance that you’re trying to keep up, then you feel like you can afford anything that you should be able to afford anything.
But when you do that, then you’re unable to afford your time, right the freedom that you want. If you’re spending all of your money, then you don’t have options, you don’t have the freedom to do the things that you that you want to do.
There’s also that “I work hard. I deserve it” mentality that a lot of us who make six figures have where you’re working so hard, you feel like you should have something to show for the money that you’re making.
You should have something to show for all of the work that you’re bringing in. You should have something to show for all the work that you’re putting in.
And I think a lot of times, more and more luxuries become necessities. It used to be that this was something that was nice to have. But over time, it has become something that you have to have.
We talked before about how when we were in law school, we could get by on a couple thousand dollars a month. And sure there are often different lifestyle changes that happen. You get married. You’ve got kids. You’ve got a house, all of that.
But there are definitely some luxuries in our lives that we enjoy now and we consider as needs that used to just be something that was nice to have, so that’s something that comes up a lot.
And then also, when you’ve got money coming in, it’s really easy to not pay attention. You know, as long as your bills are paid, then you feel like you’re good. And so you don’t pay attention to the details of what’s happening with your money.
I’ve been there before. That’s my whole story where my husband and I found ourselves over $670,000 in debt. We were bringing in good money. Our bills were paid every month. We paid our credit cards in full. We were even able to save a little bit.
But we just weren’t paying attention. And so we didn’t have that gap that we wanted, or we didn’t have as large a gap as we could have had, if we were being more intentional with our money.
A lot of times, people are living paycheck to paycheck and don’t realize it. But when you are using next month’s money to pay this month’s bills, then you’re living paycheck to paycheck.
And there is no gap between your income and expenses in that situation. But you don’t realize it because there’s more money coming in.
And so when you have a situation where there is not that money coming in, maybe there’s a job loss or a pay cut, or something like that, that’s when it becomes more apparent, but we don’t want it to be in dire straits, or we don’t want to be in a situation where we are in need for that to come up.
We don’t want there to be some emergency issue for us to realize that that’s the position that we’re in, right? We want to be on top of it.
And if we are looking at our finances, paying more attention up front, then we can course correct before it’s a need that we have to do so.
An example of how this works
So now let’s look at an example of how this gap idea works.
Let’s say that you bring in $100,000, after taxes, and you want to save enough to take a year off. And I know that’s a little bit different from what we were talking about with building wealth. But this is a concrete example of how it can work.
So you make $100,000 after taxes, you want to take a year off. And currently you’ve got a $10,000 gap. So you spend about $90,000 per year and you’re able to save $10,000. At that rate, it would take you nine years to save enough to take one year off.
Let’s say that instead, your gap is $20,000. So you are spending $80,000 a year and you’re able to save $20,000 a year. Just increasing the amount that you’re able to save, increasing that gap between your income and your expenses, now, it only takes you four years to save enough to take a year off.
And let’s say that you go all out and you decide that you’re going to live on $50,000 and put aside $50,000. Now it takes you one year to be able to save enough to take a year off.
Maybe your thing isn’t taking a year off. But that is a way to think about this in really concrete terms. Think about how much you can invest. The exponential rate at which you can save and invest just from growing that gap between your income and expenses is huge.
So that’s the thing that I really want to show with that example. Just growing that gap between your income and expenses, just increasing your savings rate a little bit has exponential effects.
How can you apply this in your own life?
So now getting into how you can apply this in your own life. Well, when we’re talking about minding the gap, increasing that space between your income and expenses, there are two sides of the equation.
You can either increase your income or you can decrease your expenses. Or you can do both.
But if you are talking about increasing your income, that can be through things such as pay raises, like if you can keep your expenses the same, but get pay raises then that’s going to be really helpful.
If you’ve got the capacity to increase your income outside of your 9 to 5, go for it. That’s great too. You can only cut back so much, but there’s no limit to how much income you can bring in.
You might have a side hustle. You might get into real estate. Whatever the thing may be, if you can increase your income, then you are definitely going to increase that gap between your income and expenses as long as you are not also increasing your expenses. And that’s where we’ve got to be mindful.
For a lot of us, we don’t have the capacity to increase our income by taking on side hustles or starting a business or whatever. But we’ve got a lot of wiggle room on the expenses side.
When we are talking about our expenses, I advocate value-based spending. And I talk a lot on here about your values and your priorities and goals because they really are the foundation for living an intentional life, living the life that you want to live.
And so when you’re thinking about your spending, think about what you value. One exercise that I often have clients do is to make a list of the top 10 things that bring joy to their lives. And when you do that list, you’ll find that a lot of the things on the list don’t cost any money.
So then you can look at where you’re spending money on things that you don’t care about. Those are the places that you’re going to cut, right? You can cut some of those things, because that cut is not going to affect your happiness.
My hope is that you will spend on things you truly care about. That could be vacations with your family. It could be shoes. It could be expensive dinners. Whatever the thing is for you, spend on that, but cut the other stuff.
When you’ve got all of these things that you’re spending on just because you feel like you’re supposed to because you’re a lawyer, or because your co-worker did it or some friend did it or whatever, then you are keeping yourself bound, you are hindering your own financial progress based on something that somebody else wants.
And I have mentioned this before, but I really like shoes. Don’t care too much about cars, right? I want it to be reliable. I want it to be safe. But it doesn’t have to be a luxury brand or anything like that.
So for me, it’s nothing to step out of my Honda with designer shoes on. And that’s okay. I don’t mind if other people feel like I should be in a different car or whatever because the money I’m not spending on my car can be redirected to spending on stuff I do care about or to my own financial goals, like my husband and I paying off our debt.
The point is, it’s a tradeoff that you’re making that allows you to keep your expenses down, grow that gap between your income and expenses, and make the progress that you want to on your money, build wealth, whatever your goal is.
Something else to consider is the Big 3 when you’re talking about your expenses. So all of the personal finance people talk about if you stop buying lattes, if you would stop with the avocado toast, or whatever the thing is that they’re harping on these days.
But honestly, your $5 Coffee is not moving the needle as much as if you got $3,000 on your mortgage or your rent, right?
So the Big 3 are the three expenses that most people have that cost the most. So it’s housing, food and transportation.
And on the housing side, I recommend that you strive for 25% of your take home pay or less. I know that that’s hard in some higher cost of living cities, but it is actually doable, just you might have to get creative.
I heard a story of a woman in New York. I think she was just outside of the city. But she is spending on average $86 a month on her place because she leases a four-bedroom apartment, and then rents out the other three units on subleases.
So those other three people are paying the rent on the apartment. And she’s paying on average $86 a month. And I’m sure that there are some other expenses that come in there, maybe when one of the units is not rented out, then she’s got to pay a little bit more or whatever. But she got really creative there, and she’s able to pay much less than most people in the country in one of the highest cost of living areas in the country.
Just think about that. Saving money on housing doesn’t always have to mean that you have to move. Moving might be a good option for you. But you can get creative. If you’ve got space that you can rent out, do that.
Same with transportation. It doesn’t necessarily have to mean that you sell your car and you know, get one that’s less expensive or whatever. Maybe you can walk sometimes or carpool or, you know, take public transportation. If your city has public transportation, it doesn’t only go like for places like Atlanta, right?
But I mean obviously, those suggestions are for when we’re on the other side of this pandemic. But just getting creative where you can for food. You can shop at stores like Aldi, or buy in bulk at Costco and Sam’s and all of that.
It could be as simple as not eating out as often, or meal planning so you don’t get takeout in a rushed panic right before dinnertime.
But the point is, just we can get creative with how to control these larger expenses. And when we do that, it’ll have a huge impact on your finances more so than giving up your daily coffee.
Okay, so let’s recap.
1. Minding the gap between your income and expenses is the key to building wealth.
2. 25% of households making $150,000 or more are living paycheck to paycheck. Some reasons for that include lifestyle inflation, the “work hard, deserve it” mentality, and just not paying attention to what’s going on with your money.
3. Increasing the gap between your income and expenses can have exponential effects on your wealth building.
4. There’s no limit to how much you can increase your income. So if you have the capacity, go for it. That is an excellent way to make your gap larger.
5. Focusing your spending on the things you value and getting wins in the most expensive areas of your budget—your housing, your food, and your transportation—will help you decrease your expenses exponentially.
Okay, that’s it for this week’s episode of Wealthyesque.
Come on over to our private Facebook community, The Wealthyesque Community, and let’s talk more about this idea of building wealth and growing the gap between your income and your expenses.
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Okay, as we close out friend, I pray that you will take a good look at your finances and consider where you might be able to grow your gap.
I pray that you will look at the expenses and make sure that you are only spending on things that you actually care about and that actually bring you joy.
And as always, I pray that you will continue to take steps to regain control of your time, build wealth and live the life of freedom and choice you deserve.
Talk to you later.
Hi, I’m Rho! I’m a wife, mom, and Biglaw associate who believes that true wealth is having control of your time. I help busy lawyers like you take back control of your time by teaching you how to achieve lifestyle freedom through mindset shifts and financial independence. Read a little more about me here.