Here’s Why You Need to Stop Measuring Your Financial Progress Against Your Income

August 26, 2024

Did you find yourself looking at the total income amount on your tax return for last year and thinking to yourself, “Well, I certainly don’t FEEL like I make that amount of money?” You’re not alone. One of the most self-destructive financial beliefs that I see as a financial planner is people justifying living outside their means because they have the idea that someone who makes what they do should be able to have the things that they want. Here’s the thing: they were already living like they made this amount of money before they got there.

They find themselves in debt because they just couldn’t wait to have the new house with the furniture and that amazing vacation to Italy. Then they had kids who now have all the gadgets (and of course, they need a comfortable, stylish car to drive them around in). Sound familiar? Welcome to the club!

So now that they’re here, stuck paying off the stuff they bought when they borrowed against this higher income they knew they’d eventually make, they find themselves struggling to prioritize paying off that debt versus saving for college, a bigger home for their growing family and retirement. And as they struggle, they keep up the cycle of revolving debt, postponing taking care of the stuff that seems so far off. (Perhaps the first 15 seconds of this classic Queen song will help explain.)

So here’s the thing. In order to get on track and really start to feel like you’re making the better income level you’ve achieved, you need to spend a couple of years living like you’re making less to pay off that debt. It’ll be tough, but it’s doable. The blogosphere is packed with people who paid off tens of thousands of dollars in debt and they can’t wait to tell you about it. I’ll save you the reading and break it down into these three non-negotiables:

Non-negotiable #1: GET THE MATCH. If your employer has a 401(k_ match, you should save at least enough to capture the match even if you could potentially lose it if you leave the company before it vests. Worst case scenario: you leave the job and lose the match, but you still get to keep the money you saved for retirement. Future you thanks you profusely and compound interest is excited to get to work for you.

Non-negotiable #2: STOP USING CREDIT CARDS UNTIL THEY’RE PAID OFF. I’ve seen too many people try to juggle paying off the new charges while also paying down balances and end up getting deeper and deeper in debt until they had to enter a formal debt management plan to get out of it. This could mean a few months of pain while you adjust to only spending the cash you have on hand, but it’s the only way you’ll see the light at the end of the tunnel. Make your credit card payment a fixed amount, then use the Debt Blaster calculator to pay it off. Once the debt is gone, you’ll already be used to not spending that amount of money, so you can use it to turbo-charge other savings goals.

Non-negotiable #3: GET A LITTLE NEST EGG SET ASIDE. There are personal finance celebrities who would say differently, but you need to have some savings set aside while you pay off debt or you risk sliding right back down the next time something unexpected pops up. When I started digging out of my debt hole in my 20’s, I also started saving $25 per paycheck into a separate savings account. I used that money if my only alternative was credit cards (read: a real emergency like having to buy a plane ticket for your grandma’s funeral, not a sale on your favorite Lulu® pants).

It won’t be easy, but it will be worth it. And keep these Jedi money mind tricks in mind to keep you from straying from the plan. I’m always interested in what money tips and tricks work for others, so please share. You can let me know in the comments or send me a tweet at @kclmoneycoach.