Wealth Potential is Determined by Your Expenses Not Your Income

Our monthly expenses can be categorized into either discretionary or non-discretionary. Non-discretionary expenses include expenses that must be paid each month no matter what. Generally there is a contract or other obligation associated with them. These kinds of expenses would be expenses such as taxes, mortgage, insurance, utilities, student loans, etc. The money that is left over after the non-discretionary expenses have been paid is our discretionary income. It is this income that we have the most control over. This money is used to purchase groceries, pay for gas, eat out, fix issues on the house, pay for television, cell phone, dry cleaners, etc.

Many people define wealth in absolute terms. They think there is a specific income that means you are wealthy. Wealth, however, is better viewed in relative terms. In other words, your wealth is the difference between your non-discretionary expenses and your income. The larger the spread, the more likely you are to save money, the less of an impact luxury purchases have, and more likely, the less anxiety you have about money.

Take the example of a person who makes $10k/month as income. If this person has non-discretionary expenses such as taxes, mortgage, insurance, and utilities of $8000 per month, that leaves $2000/month for discretionary expenses. Take out $1000 for groceries and gasoline and that leaves $1000/month to do whatever with. In absolute terms, this person has a wealth of $1000/month.

A personal income of 10k/month is pretty good. That translates to $120k/year, which is far above the national average. If this person were to purchase a simple dress for $100, that would seem like a very insignificant expense. That purchase only represents 1% of her monthly income. However, based on the expenses from above, that same purchase represents 10% of her wealth. If this same woman has three children that each need three new outfits for school, an entire month of wealth could be lost in a single trip to the store.

Having a better income can make saving and investing easier, but your ability to save is not defined by your income, it is defined by your wealth. A person making $3000/month can save just as much as a person who makes $10k/month. This same principle also means that a person in Tennessee can save just as much as a person living in California. Just because a person in California makes more money for doing the same job, does not means that person is wealthier. What this all means for the reader is that your personal wealth is entirely in your control. It is a factor of how you choose your monthly expenses. Outside forces have little influence.

If you have no personal wealth at the end of each month, the first step is to stop blaming others. Don't blame your company for your lack of wealth and don't hate other people because you think it is easier for them. Focus on the real source of wealth which is the relationship between your income and expenses. You may not have much control over your income, but you do control your expenses. Start there.


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