Everyone Has Their Own Money Trauma

Posted August 10, 2023 by Ben Carlson

A reader asks:

I’m 38 years old and for most of my adult life I didn’t make much money. I made just enough to survive with nothing left to invest. Everything changed a few years ago. I went from making $35k per year to around $140k in about 4 years. At first I spent everything, but in the last two years I’ve started doing the opposite. I save everything. My monthly expenses including my mortgage are less than $1,000. My after-tax saving rate is somewhere in the neighborhood of 80-90%. In the last two years I’ve saved about $150k not including maxing my 401k and Roth. My job isn’t going anywhere but I have a constant fear that something is going to happen and everything will be ripped away. Key thing is I have no real skills but happened to hit the lottery at a company that has rewarded me for a decade of hard work. My question is: most financial experts would probably say I’m saving too much but I’m wondering if my situation justifies the high savings rate?

I love this question because it shows how money is more about your mind than math.

A lot of the questions I receive can be similar from a financial perspective but we all have our own forms of money trauma depending on our circumstances.

First off, while I like it when people remain humble but don’t sell yourself short. Hard work is a skillset and if your company has given you a 4x raise in four years you’re obviously doing something right.

I understand the trepidation to spend money in a situation like this.

The lottery mindset can cause some conflicting money emotions.

Most people spend their entire careers methodically increasing the amount they make over time and slowly building wealth through regular savings.

One of the reasons so many actual lottery winners end up broke is because it’s not normal to experience such an abrupt increase in your wealth.

I wrote about this in Don’t Fall For It:

According to the Certified Financial Planner Board of Standards, almost one-third of lottery winners declare bankruptcy. These winners ended up in a worse place than they were in before winning gobs of money. Lottery winners have also been shown to be more susceptible to drug and alcohol abuse, depression, divorce, suicide, or estrangement from their family.

Even the neighbors of lottery winners are more likely to go bankrupt than the average household. Researchers at the Federal Reserve discovered close neighbors of lottery winners in Canada were more likely to increase their spending, take on more debt, put more money into speculative investments, and eventually file for bankruptcy. And the larger the winnings, the more likely it was others in that neighborhood would go bankrupt.

Wealth is simply the difference between what you make and what you spend, so the secret sauce to building wealth over time is avoiding lifestyle creep as your income rises. This is one of the reasons so many lottery winners go broke. Their lifestyle grows exponentially larger than their pile of money.

To continue reading, please go to the original article here:

https://awealthofcommonsense.com/2023/08/everyone-has-their-own-money-trauma/