You should increase your investments, not your spending.
When people earn more money, they immediately begin to spend more money.
They buy a nicer car, move into a larger house, and eat at more expensive restaurants.
This is called lifestyle inflation.
People should put the majority of income increases into their portfolio instead of increasing their spending.
I know that this is difficult. People have a bias, as they value immediate rewards much higher than future rewards. Asking a person to cut their current spending to invest more money for the future triggers an immediate psychological reaction. You worked hard last year and deserve that $20K vacation to Bali.
Many people treat their bonus differently than their salary, viewing it as free money meant for luxury spending rather than capital meant for wealth creation.
But you need to get over this bias and think of it as paying your own bonus in 20 years.
Nobody is saying that you can’t go to Bali, but you don’t have to go all out and spend all your bonus.
$10K invested for 20 years at a 9% per year return will be worth $56K in 20 years.
So if you don’t waste all your bonus, you could have $56K when you get older.
If you get a 15% net salary increase, you should allocate at least half of that towards your investment account, instead of increasing your lifestyle. Increase the size of your regular deposits.
Investing $500 per month for 20 years at 9% interest will create a $319K portfolio, while $700 will create a $447K portfolio. That’s a difference of $128K.
Surely, you can spend $200 less per month to have $128K in 20 years?
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