Lifestyle vs. "Earnings and Net worth"

When young professionals get into the job for the first time there is much to be happy about. Until now mostly they were spending money and for the first time they get to see serious money coming in.

Actually for about ten years into their career they don’t have to worry about things (unless they screw up big time) as their salaries go up according to their industry practices.

As their earnings and net worth increase, there are generally two types of approaches that people take

1. The Practical Approach


In this approach, lifestyle line lags the “earnings and net worth” line. This will be the case for the rest of their career. The advantage with this approach is that there is a healthy buffer to take care of bumps (market corrections, personal projects, further education, family issues) in the road.

2. The Fairy Tale Approach


In this approach, the person gets carried away mostly due to peer pressure and sometimes due to lack of long-term vision. There are marketers out there wanting to make everyone feel that their product or service is a MUST. It can be as simple as a Television that is too pricey, a car that you can’t afford or a home that is beyond your reach.

Once the lifestyle line crosses the “earnings and net worth” a time bomb gets activated. The person obviously has more expenses than his or her earnings and net worth will support. While there is all the reason to celebrate an upgraded lifestyle, here are some of the problems associated with it:

1. Lack of flexibility: Since there is not much room to play, the person may not want to look at all opportunities that are opening up UNLESS there is a CERTAINTY that this will work

2. Lack of risk-taking: Healthy risks are a must to make big moves. There are no guarantees on almost anything in life. Because of the situation at hand, the person won’t be interested in taking risks even when it hurts.

3. False ego: When the person has a lifestyle that is not “real” and the person starts associating himself or herself as if it is, more problems show up. The person now has to defend something that is not what it is. You can imagine the issues there.

Note: Thanks to Naveen Lakkur for this. Naveen and I were talking until late in the night yesterday about a ton of things and this was one of the topics.