Have you ever heard of the analogy people use to describe that you can never really get far enough ahead before life catches up with you ? You haven’t ? Well, let me share it with you really quick before we get on with today’s post.

I have often heard that once you realize that your fridge is too small to hold all your food for the week, you usually go out and buy a bigger fridge, right? And then what happens…? After a few short weeks, you start to gradually buy more stuff and bingo, you fridge is too small yet again.

It’s a great analogy for how most people live financially, too. The majority of employees make a certain amount each month and that amount is what we get used to. It generally doesn’t change that much within a year except for maybe a Christmas bonus or so.

Let’s look at our friend John who takes home $ 3,000 per month after taxes. Well, I would wager a guess that the total expenses of his lifetsyle are very close to $ 3,000 per month if not even higher. In the past few years an alarming trend has taken hold in North America. We have gone from a savings rate just above zero to a negative savings rate. That means on average we are spending more money than we make.

Not only that, we are spending more money than we actually have, because the illusion of a nice credit limit on our AMEX or Visa are NOT part of our net worth. Countries outside of North America actually have a much higher savings rate, such as China or Japan were culturally people are very cautious towards the future and thus put cash in the bank before they spend any.

But this post is not about money’s cultural ties, as much as it is about the trap we set up for ourselves if we rely on the paycheck to keep us afkoat and eventually fund our lofty retirement dreams. I’m a big advocate of having a luxurious lifestyle, and firthermore, this blog wouldn’t exist if I didn’t believe that this can be accomplished before we are old an grey and with a lot less effort than society let’s you believe.

So, back to the example of John. Let’s assume his job performance is good and he get’s a raise. After that raise, he takes home $ 3,500 after tax and the first thing he does when he get’s his higher paycheck is he goes and leases a bigger car. After all he is moving up in life and everyone shall see that.

Let me tell you something that I have observed from managing sales teams a few years back that rely on commisions for alarge portion of their pay. When times are good and the money is rolling in, the sales people have all the latest gadgets and eat out at fancy places every night. Then when all of a sudden a big account goes belly up, the end seems near, the girls they dated are leaving and the lifestyle is gone overnight.

The worst part is that it’s a veru shortsighted way to build wealth because before you can spend it you should have a plan and follow a solid strategy that doesn’t include the local poker room to beef up your paycheck.

Here’s what I eman by that: The CEO also loves to have and do what the sales team does, but when times get rough, he is still driving the same nice car and still takes his family for a nice vacation no matter what. And because I want all my readers to be in that second category I would advise to keep a buffer between income and expenses of a few percent every paycheck.

That way you will still not be rich overnight if you are on a salary, but at least you can invest on a regular basis and have a nice cushion if times turn. And better yet, for most of us we will thankfully never be exposed to a layoff or a bad economic cyle which means we can take that money and make it work for us in our investments. Over time, you will be amazed what 5% of your paycheck will turn into if you invest it into an index fund rather than a portehouse steak and a couple of bottles of wine.

At the end of the day, you’ll be in the same spot as the CEO and that’s where life is good and money is working for you while you realx and do only what you really want to do.

Happy living and we’ll see you at the top…

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