Embracing the Power of “Looking Poor”: A Path to Wealth
Meet Emily
As a 34-year-old engineer living in Hamilton, Ontario, Emily has achieved considerable success in her career. Working for a well-established and growing firm, she earns a comfortable income, enjoys the fruits of her labour, and loves the finer things in life. Yet, despite her relatively high salary, Emily has found it challenging to build significant wealth. She’s realized that her desire to “live rich” is preventing her from achieving long-term financial stability.
Emily’s story is not uncommon. Many people with successful careers find themselves in a similar situation—enjoying their income today but struggling to build wealth for tomorrow. The key to changing this narrative lies in embracing a mindset of modesty and learning to “look poor” while actually growing wealthy.
Reduced Financial Pressure: A Gateway to Freedom
One of the first steps Emily needs to take is to recognize that maintaining her current lifestyle puts a lot of pressure on her finances. Whether it’s leasing a popular luxury sports sedan, regularly dining out with her friends, or renting a high-end apartment, these choices create unnecessary financial strain.
By turning her focus from impressing others to prioritizing her financial security, Emily can lighten this burden she is placing on herself. She could start by reassessing her major expenses. For example, she might consider downsizing to a more affordable apartment or opting to purchase a reliable used car instead of leasing a new one every three years. Instead of dining out, she can propose to her friends that they hold a regular potluck, rotating among their homes. These changes would free up a significant portion of her income and reduce the pressure she currently experiences with her high-cost lifestyle.
An Increased Savings Rate: The Key to Building Wealth
With the money now freed up, Emily’s next step is to use those savings to grow her wealth. With a good income, her potential to save is significant, but it requires conscious effort and discipline.
A first step toward establishing a firmer financial foundation is to work toward building an “emergency fund.” Since Emily rents her apartment and is debt-free, the equivalent of three months of living expenses should be adequate. She has decided to open a high-interest savings Tax-Free Savings Account (TFSA) for that purpose. She has also set up a car purchase “sinking fund” that will allow her to buy a 2-year-old car every 8 years. This will go into the TFSA as well, but she’ll track the different categories using a spreadsheet. This money will be automatically transferred into her TFSA every two weeks when she gets paid.
Emily would like to eventually own a home. She has a boyfriend and more recently they have begun to talk seriously about a future together, which in their minds includes an owned home and children. To that end, Emily has decided to open a Tax-Free First Home Savings Account (FHSA). She knows she can contribute up to $8,000 per year but with her emergency fund a priority, she has decided to limit her contributions to $250 per month ($3,000 per year) for now.
Emily’s employer provides her with a defined contribution pension plan and matches the 5% contribution of her earned income with an additional 5%. At her current salary, she can contribute up to an additional $8,000 (8%) to a personal RRSP, but as with her FHSA, she’s limiting her contributions to $3,000 per year for now.
Long-Term Wealth Accumulation: Letting Compound Interest Work
Once Emily has established a habit of saving and opened her accounts, the next step is to let those savings work for her. By investing in a mix of stocks and bonds through Exchange-Traded Funds (ETFs) and Guaranteed Investment Certificates (GICs), she can take advantage of compounding—the most powerful tool for wealth accumulation.
For Emily, this could mean consulting with an advice-only financial planner to recommend an investment portfolio with an asset allocation suited to her risk tolerance and in the context of her financial goals. By staying committed to her investment strategy, she’ll see her wealth grow exponentially over time, even if the initial gains seem modest.
Financial Flexibility: Adapting to Life’s Changes
Living a more modest lifestyle will also provide Emily with greater financial flexibility. Life is unpredictable and having the ability to adapt financially to changes—whether it’s an economic downturn, a career change, or an unexpected expense—is crucial.
For instance, by cutting back on luxury expenses and maintaining a healthy emergency fund, Emily can be better prepared for financial challenges that may come her way. This flexibility will not only protect her from financial stress but also give her the freedom to make life choices based on her true desires rather than financial necessity.
Reduced Risk of Debt: Avoiding the Trap of Lifestyle Inflation
One of the most significant risks of “living rich” is the temptation to finance a luxurious lifestyle through credit. Whether it’s a high credit card balance or an expensive car loan, debt can quickly become a burden that prevents the accumulation of wealth and creates financial stress.
Fortunately, Emily lived to the limit of her means but seldom exceeded it. She paid off her student loans a couple of years ago but until now had not been saving the resulting surplus cash flow when it came available. She decided that she needed to commit to more than simply a debt-free lifestyle. For her, this now means not only avoiding new debt unless absolutely necessary but also making her savings one of her necessary expenses. That way, Emily can protect herself from the dangers of debt and keep more of her hard-earned money working for her future.
Sustainable Lifestyle: Building a Financially Resilient Future
A modest lifestyle isn’t just about saving money today; it’s about creating a sustainable way of living that Emily can maintain throughout her life. As she progresses in her career and her income grows, it’s easy to fall into the trap of lifestyle inflation—where increased earnings lead to increased spending, exactly Emily’s problem over the last decade.
Instead, Emily has decided to focus on maintaining her newly adjusted standard of living even as her income rises. By resisting the urge to upgrade her lifestyle with every pay raise, she can ensure that her financial habits remain sustainable and that her wealth continues to grow over time.
Enhanced Focus on True Wealth: Prioritizing What Matters Most
Another important aspect of “looking poor” is recognizing that true wealth isn’t just about money. It’s about financial security, good health, strong relationships, and personal fulfillment. By not getting caught up in the pursuit of an ostentatious display of wealth, Emily can focus on what truly matters in life.
For Emily, this might mean spending more time and money on experiences that bring her joy, such as traveling, pursuing hobbies, or spending time with loved ones. These investments in her well-being and happiness are far more valuable than any luxury item and contribute to a richer, more fulfilling life.
One of the methods she immediately latched onto was to delete most of the Instagram influencers she had been following and search for frugal living and frugal travel accounts instead. Instead, she decided to do a lot more local travel and get back into the backpacking she did in her university days. Along with exchanging restaurant outings for potlucks, Emily also got into exploring cooking and baking.
Contentment and Satisfaction: Finding Joy in Simplicity
Finally, by embracing a more modest lifestyle, Emily is finding contentment and satisfaction in the simplicity of her choices. The peace of mind that comes with financial security, the joy of living below her means, and the satisfaction of seeing her wealth grow over time are far more rewarding than the temporary pleasure of luxurious living.
Emily is beginning to cultivate a mindset of gratitude for what she already has, rather than constantly striving for more.
A New Path Forward
Emily’s journey from “living rich” to “looking poor” is about more than just cutting back on expenses; it’s about redefining her relationship with money and adopting a mindset that prioritizes long-term wealth over short-term gratification. By embracing the power of modesty, she is freeing herself from financial pressure, increasing her savings, and building a sustainable lifestyle that supports her true wealth—both financially and personally.
As Emily makes these changes, she is not only seeing her financial situation improve, but she’s also discovering a deeper sense of fulfillment and contentment in living a life that’s rich in the things that truly matter.
This is the 257th blog post for Russ Writes, first published on 2024-08-12
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