Your time-money exchange rate (your TiMER) can be a mental anchor to make more logical decisions about spending both time and money. However, there are several factors that conspire against us as high-income professionals. One is that it is easy to fall into the earning & spending trap from multiple angles.
The bait for the trap is alluring. It can be subtle, and we may not recognize the bait for what it is. The jaws of the trap could clamp down suddenly due to burn-out, a financial shock, or a health problem. It can also be like a Chinese finger-trap, slowly tightening the further we wiggle into its grasp. Learn how to detect, disarm, or extract yourself from this trap. With all your digits intact.
The Earn-More Bait
Being a professional comes with the flexibility to control how much we work to some degree. Generally, there are ample opportunities for us to work more if we want to. Decreasing work is possible, but more challenging for most of us, due to few factors.
When we do work more, we are rewarded. Medicine is financially rewarding, we are helping people, it brings respect and prestige, and it is socially and mentally stimulating. Dedication to your patients and work above all else is celebrated in medical culture. In our broader culture, many of us feel pressure to be a “good provider” for our families, and the income helps us to do that.
We may tell ourselves that no one else can do the work we do. Or even that our colleagues may be able to do it, but not as well as us. We are special. Working more reinforces that notion because the more hours we put in, the more experience we have. Much of our identity and self-esteem can be wrapped up in being a great physician.
The ability to work more coupled to the financial, social, and egotistical rewards that come with that work make for a potent bait. When you decide to work more, be sure to ask yourself:
- Are you working to buy more stuff for your family when what they want is more of your time?
- Can someone else take on the extra work? Do they have more, or less, capacity to take it on than you do?
- Are you making yourself better by gaining experience or worse by burning out?
- Will working more hours now mean shortening your career more than you want to later?
The Spend-More Bait
There are a few factors that bait us into spending more as high-income professionals.
One is delayed gratification. You have likely put off many discretionary spending items to train and establish your business or career. That builds pent-up demand. Both for you and those who have journeyed with you, like your family. You have all been looking forward to when you can “spend like a doctor”. That gets coupled to an income or wealth effect.
“We can’t afford it”, doesn’t seem to hold the same weight when you see the money rolling into your accounts. It changes to “We deserve it” pretty quickly. That shift in direction may be accurate and appropriate. Just be cognizant of the velocity. The G-forces may be exhilarating at first but can become crushing.
The wealth effect is when people start to spend more as their assets on paper rise in value, even though their income stays the same. Conversely, increased consumption is also strongly correlated to real income increases. Importantly, that can apply to a new professional who sees their income increase many-fold while their net worth is still strongly negative due to debt. It can also impact established professionals.
I call it extra-shift-syndrome and I have battled it my whole life. Knowing the after-tax value of your time helps you to know how much you must work to pay for something. That is good, but you must be aware of creep. It may start as a one-off decision like: “I want that big screen TV, it is just a couple of extra shifts to pay for it. No problem.” That probably is no problem. However, there are a number of factors that could turn that spend-more, earn-more-to-pay-for-it approach into a trap. You won’t see the trap before it is sprung.
The Spend More Earn More Trap
Either earning more, or spending more, or some combination of both can bait the trap. They are mutually re-enforcing. The other problem is that we may not realize that we are taking the bait before the trap is sprung.
The trap is sprung when we are unable to earn enough to meet our spending need. A financial crisis. It can occur due to a loss of earning power or to expenses that we cannot cover. That may happen suddenly, like a bear trap. Or slowly and insidiously like a Chinese finger trap.
The Bear Trap
The trap from spending more and trying to make up for that by earning more can be sprung suddenly like a bear trap. That could happen through a trigger event like burn out, a health issue, or an unexpected expense. Suddenly, you have outstripped your ability to work and earn more.
The underlying problem is that we only have a finite amount of human capital. If we are using it all to work to pay for current consumption, then there is no reserve to absorb a shock. That could be a human capital shock, like not being able to earn as effectively due to burn out, a personal health issue, family issue, or a change in your workplace.
It could be a financial shock from an unexpected major expense.
A shock of some kind is inevitable. Life happens. The probably of a health issue increases as we and our loved-ones age. Concomitantly, our human capital declines as we age. That is further exacerbated if all of our life-force is spent working rather than using some to exercise, sleep, self-improve, and build the relationships that keep us healthy.
The springing of the trap may be sudden, but the underlying problems were often accumulating slowly over time.
The Chinese Finger Trap
Even if we do not have a sudden shock, spending more and trying to earn more to make up for it, slowly puts us into a worse position over time. That is because our TiMER becomes progressively less efficient the more that we work and earn money. To make matters worse, we adapt to our spending and get fewer life-satisfaction-units per spend. Left unchecked, our spending, and the workload to support it, could increase over time with diminishing returns.
These diminishing returns are sneaky enough that we will miss them if we are not paying attention. So, let’s pay some extra attention and examine this further below.
Diminishing Returns on the Work Treadmill
One reason why our TiMER may worsen as we work more is that we become less efficient if we are fatigued. We also don’t have the time or energy to invest in making systematic changes to our practice to improve efficiency when it is all consumed simply doing the daily work. If you just hammer-down on the treadmill with bad technique, then an injury is inevitable. More so, when you are tired.
The other reason why our TiMER worsens as we work to earn more is our progressive taxation system. The TiMER will quickly drop as you earn money and the new hours worked are in progressively higher tax brackets. Below is a screenshot from my TiMER calculator to illustrate. You can use the calculator to enter your own numbers.
A professional corporation helps regulate your TIMER. If you can control consumption.
A professional corporation can help smooth cashflow and reduce the drop-off in TiMER from income tax. However, it can only do that if you are spending much less than what you make. If your consumption forces you to pay out of your corporation whatever income you earn, then it is unhelpful. In fact, that is generally less tax efficient than simply earning the income personally.
The Hedonic Treadmill
Spending Begets More Spending With Diminishing Returns On Happiness
Some purchases trigger accessory wants and needs.
One way that spending causes more spending is that we buy stuff that requires ongoing upkeep and maintenance. For example, I may buy a luxury car. That comes with more expensive insurance, more expensive repairs, and possibly premium fuel costs. Those are predictable and necessary extra expenses that come with the purchase.
However, it may also trigger other wants disguised as needs. I may “need” a bigger garage for my nice car or a shed so that my garden equipment and bikes don’t fall over and ding it. It just doesn’t look right parked on the concrete floor of my garage – a nice epoxy finished floor would be better. Maybe I should heat it, so my baby doesn’t get cold. A vanity plate and new sunglasses to look cool driving it. Nicer floormats – just to protect it, of course.
Just so you understand that I am speaking from experience, the above photo is the inside of the building that I built to house my big spends. It all started with looking for a pop-up trailer. I adapted and needed more quickly.
We adapt and need to spend more to maintain our satisfaction.
Humans are very adaptable to our circumstances. That has allowed our species to thrive and find happiness despite adversity over the millennia. However, in the affluent modern world, it can also hinder our happiness. When we buy a new item or experience, it is novel and exciting. However, we adapt to that and then seek something even more novel and exciting to maintain the same level of satisfaction.
Naturally, we slowly ratchet up the speed on the hedonic treadmill. To combat this requires active thought and effort. Left unchecked, the increasing consumption (and earning required to support it) gradually increases to ludicrous speed. We must wake up and gradually take ourselves off. Hopefully, before a triggering event causes us to trip or someone shuts off the treadmill unexpectedly and we will do a lip-skid.
The income and happiness curve plateaus and may even drop with more spending.
The studies of income and happiness do show that having more income is correlated with higher happiness. The effect becomes progressively blunted and is influenced by your mindset. I have long since sold my “toy-barn” and almost everything in it. It is a relief to not have to maintain everything. However, I did so deliberately and still have the items that bring me ongoing satisfaction.
Detecting & Disarming The Earning-Spending Trap
The earning-spending trap is feed by both earning and spending. However, it is most deadly when our earning is being driven by our consumption. That leaves us vulnerable to a shock. Until there is a shock, the danger is easily missed by professionals who can take on extra work and are rewarded for doing so.
This does not mean that we must simply not spend money. The key is prioritization. Be deliberate with spending money, and wise with spending time.
You need to understand your current financial situation and where you want to be. Prioritize setting aside the money for your security before spending it on discretionary consumption.
In the short-term, that means having money for fixed must-have expenses plus saving for unexpected emergencies.
In the long-term, it means investing for your kids’ education and your retirement or financial independence.
You do need to indulge yourself. If you do not, then the pent-up demand will cause a spending explosion at some point. Just spend deliberately.
Spend Money Deliberately
Spending money deliberately means not being cheap, but also not being impulsive. Consider the true cost of ownership of a purchase. The time and money to maintain it, and whether it is in line with your core values and goals.
Will it bring you lasting happiness?
Is it simply a level up on the hedonic treadmill from something you already have, or will it truly add lasting value?
Spend Time Wisely
Consider how much something will cost in terms of your time and life-force. You can use the bottom field of the calculator in this post to help you with the time-money exchange.
Is your time best spent to buy that item or spent doing something else with what you already have?
If it is a service, will it recharge your human and social capital more than it costs?
Is it a good exchange? Remember that the exchange rate worsens the more that you work and spend. When your time and life-force is used up, will you look back on it as a wise use of the time that you had?
Safe Extraction If Your Fingers Are in the Trap Already
Stop struggling and making it worse. Change course. You can control it.
Making the occasional deliberate extra purchase and working a bit extra is not a disaster. Especially if it is an informed decision. The problem is when you put your head down and let that become the new normal. Until you adapt and take it to the next level. Instead, watch where you are going. Choose your path forward guided by what you value most while considering the time and effort required to pay for it.
Don’t let the spend-more-earn-more trap lead you into a bigger trap. Gambling.
One of the reasons why we invest is so that our money can make more money for us when we cannot work for the money we need. When you are running out of time to grow your money, don’t try to make up for it by taking excessive risk instead.
It is vital to remember that risk and potential reward are tightly related with investing. Risk can materialize as loss and potential reward is only potential. If it seems too good to be true, then you are missing something. You may be gambling instead of investing. To compound this, the risk that investing poses increases the closer you get to needing the money.
It is tempting to work and earn more to pay for more spending. Professionals are particularly vulnerable to this because we have pent up demand from delayed gratification, a sudden income jump, and rewarding work in abundance. However, the diminishing returns for working and spending mean that you cannot out-earn a spending problem. If you do find yourself taking the bait, you need to stop wiggling and slowly extract yourself. If not, you will make it worse as you adapt to higher levels of spending and working. Like a Chinese finger trap. Those who don’t take stock and change course may be shocked when the trap suddenly snaps shut, like a bear trap. That can happen unexpectedly when there is a shock to your human capital or an unexpected expense. The risk of that increases as you age. You must prioritize looking after future-you before indulging current you so that the money will be there when that inevitably happens. That does not mean punishing current-you. Just spend your money deliberately and your time wisely. If you ignore all of this, then you may make things worse by gambling to try and make up for lost time later. At the worst possible time.
Recognizing the potential trap laid out in this post helps. However, it can still be hard to avoid due to our biology and behaviour. In the next post, we’ll explore the biology of happiness to develop strategies for avoiding a lip-skid on the hedonic treadmill.