[This article was written as a result of a Q&A session with the CEO of ValueChampion. This is the full-length, unedited version.] Most people know that education is a powerful and proven way to get out of poverty. But what they don’t realise is that it’s easy to slip back into poverty, even with a high-paying job. Let me explain.
When I was growing up (in the US), my family lived just above the poverty line – which was enough to qualify me for free school lunches, but not enough to get food stamps. With my family living paycheque-to-paycheque, I felt like we were always on the precipice of financial ruin.
I had a close-knit group of 4 childhood classmates; we all had the same socioeconomic status. Our plan was to study hard, get into a good uni, graduate, and hopefully find a stable and lucrative career.
That was the plan. But here’s where my path differed.
1. Getting a Good Education
My friends all applied to top rated universities. For me, I realised that getting a solid education isn’t perfectly correlated with the university’s ranking or cost. It has more to do with whether you take full advantage of what the uni has to offer. So, a uni known for partying, or one that is so expensive that I’ll spend more time working than studying wasn’t worth it to me.
My decision on which uni to attend boiled down to which one gave me the most funding in terms of grants and scholarships.
I applied to over 30 scholarships and was rejected 26 times. That’s 26 “no’s”. But that’s life; you will hear “no” more than you will hear “yes”. But hearing “no” means you still tried. And as Wayne Gretzky said, “You miss 100% of the shots you don’t take.”
During my years in uni, I took advantage of almost every opportunity that came my way. I wasn’t smart, but I was damn persistent.
I actively sought out mentors — a famous inventor professor, a Nobel prize nominee — and attended most of my professors’ office hour sessions. Professors talk. And by the time I was in my 3rd year, most of them (in the engineering department) knew of me, even if I had not taken their class.
This is how I landed my first paid internship. A professor made one phone call, and just like that, I was hired.
2. Keeping Your First Paycheque
The first paycheque I received was from that internship. I had earned enough from one single day of work to cover an entire month of rent (in California). It was thrilling and for the first time, I felt a sense of financial security. I paid my rent and banked the rest of the cheque.
No buying a new phone to celebrate, or treating myself to a nice 5-star meal. I banked the money and never looked at it again.
I imaged my classmates experienced the same exhilaration with their first paycheque. But they spent it on new things. Every time we met up, they had fancy clothes, handbags, and jewellery, while I continued to wear second-hand clothes.Their outward appearances changed, but I appeared the same.
This made me feel a bit unworthy and insecure. But at the same time, I knew my inward situation (which was more significant) was changing. I didn’t have any debt. And I was set to graduate on time (some of my childhood classmates took 5 or more years).
When you leave for uni, people expect you to grow, mature, and change. They want evidence that you succeeded on your own. But focusing only on outward change almost always leads to lifestyle inflation.
3. Avoiding Lifestyle Inflation
I’ve previously written about how lifestyle inflation robs us far more than actual (monetary) inflation. And, how it causes us to stay on the hedonic treadmill – forever. Here’s the hard truth about lifestyle inflation: once your basic needs are met, improving your lifestyle more will only bring you a fleeting jolt of joy.
We, as humans, adjust very quickly and easily to our circumstances. That jolt of joy will soon feel “normal”. We will no longer feel as joyful or happy about our upgrade in lifestyle, once we adapt.
Loss aversion tells us that the pain of loss is roughly twice the joy of gain. This means moving downward in lifestyle feels very, very painful. But the danger of climbing higher and higher is that eventually you will crash. So I figured why set myself up for that crash if I’m already quite content at my current lifestyle level?
But human adaption can also work in our favour. If you force yourself to spend less and save more, any unhappiness you may experience is likely to fade and you’ll be wealthier and more financially secure. Likewise, if you’re unhappy now, spending more will eventually make you unhappy again, and you’ll end up poorer and less financially secure. So you have to ask yourself whether a brief spike in happiness is really worth it.
4. Saving is More Powerful than Earning or Investing
These days, it’s really hard to control how much you earn. You can change jobs, get a raise, or put in more hours to earn more. These are all quite difficult, as they depend on many factors which are not entirely under your control. Saving (not spending), on the other hand, is more within our control.
By tracking your spending (it’s tedious, I know, but necessary) for at least two weeks, you can get a sense where cuts or substitutions can be made. As Benjamin Franklin once said, even “small leaks sink big ships.”
Most people think if they make smart investments, they can spend to their heart’s desire. But consider how difficult it is to earn a consistent 10% rate of return. If you save (not spend) $27 a day, or $200 a week, that’s equivalent to an extra $10,000 a year. And $10,000 is equivalent to investing $100,000 at a rate of return of 10%.
So it is easier to earn and then invest $100,000, and get a consistent 10% rate of return? Or easier to save (not spend) $27 a day from your paycheque?
5. Minding Your Relationships
A person doesn’t have to be insolvent to feel poor. I’ve met my share of well-off individuals who have left a trail of broken relationships as a result of a focused and relentless pursuit of money and/or power. In some ways, their lives reminded me of what it was like growing up in poverty.
We are social creatures who need belonging and connections. We all need somebody. Social capital can be just as or even more important than financial capital.
I feel rich today not because of my net worth, but mostly because I have a strong relationship with my family.
I started Frugal in Singapore the year that my husband and I achieved a comfortable level of financial freedom. Achieving our minimum retirement goal in our 30s gave us the freedom to pursue our personal interests. One of my passions was to write about the merits of frugality. The reason I didn’t start writing earlier is because I didn’t want to be a phony, writing about topics and goals that I myself had not yet achieved (something many financial advisors are guilty of).