This is a saving strategy that I’ve mentioned before but I thought it deserved more attention as I believe this is one of the larger factors as to why we are able to save a significant portion of our income.
That is, when you obtain extra income, instead of spending it or increasing your lifestyle, bank or save it instead. The extra income can be in the form of tax refunds, GST cheques, salary increases, business/investment income etc.
As I have explained in our financial story before, we graduated university with a boat load of debt. However, we kept our expenses low by living frugally, renting out a portion of our home (paid for most of the mortgage), and constantly looking for opportunities to increase our income. As we are professionals by trade, even though we didn’t start with huge salaries, our incomes have increased every year.
Instead of using the pay increases to fund a more expensive lifestyle immediately, we continued to keep our expenses low while saving and investing the increased income. We did this for about four years and as a result, eliminated $65,000 worth of student/car debt, purchased another rental property (now sold), and had a good start on an investment portfolio. If you’re interested, you can follow my net worth progress since late 2006.
Today, even though our expenses have increased with the baby and the new house (no apartment), we still live fairly frugally and bank extra income. For us, most of the extra income comes from dividends and the online business.
Coincidentally, this same strategy helped QCash build his million dollar net worth and fund his early retirement.
What do you do with extra income? Do you splurge it on yourself? Or do you save/invest it?