“Most black doctors are broke.”

Imagine my surprise when an elderly physician told me this matter-of-factly. He wasn’t talking about money. He was alluding to something far more subtle and important.

Doctors, in his opinion, were broke not in terms of income or money, but instead, they were broke in terms of wealth, – the only financial measure that really matters.

The important difference between income and wealth

To escape the paycheck to paycheck money trap, it’s important to understand the difference between wealth and income. Income is the money we earn. It’s the money we use to pay the bills and maintain our lifestyles.

Wealth, on the other hand, works for us. Wealth is the money and assets that create even more money and assets. The truly wonderful thing about wealth is that anyone can create it, regardless the size of their paycheck.

Wealth can be something as simple as the money earning interest in a savings account or the money invested in a 401 K account. Other forms of wealth include stocks, bonds, mutual funds, income producing properties, and homes. Nurtured and given enough time to grow, wealth eventually provides us with financial freedom.

If wealth is the key to financial freedom, why are doctors and the rest of us so lousy at creating it?

Lifestyle inflation destroys our chances to create wealth

It’s simple. As humans we have this nasty little tendency to spend everything we make, right down to the very last dime. Some call it lifestyle creep. Others refer to it as lifestyle inflation. Regardless the name, our lifestyles expand to consume our salaries.

Herein lies the problem. It is the money we don’t spend that creates wealth. It’s the money left over after the spending is done that can be invested to create true wealth.

With this in mind we can understand why my friend stated, “most black doctors are broke.” Physicians are the most visible examples of lifestyle inflation. Large salaries support larger lifestyles, with little left over for wealth building investments.

Consider this fact: the average doctor graduates with over $156,000 of debt. Yet, when the first job comes along, money goes flying out the window.

The 1999 Toyota Corolla is traded for a 2015 BMW 3 Series. Don’t forget the higher car insurance, maintenance bills, and premium gas bills to go along with that hefty new car payment.

A new physician deserves new digs. A new condo sounds nice. Add property taxes, home owner’s insurance, home owner’s association fees, maintenance, repairs, and don’t forget new furnishings because IKEA just won’t cut it anymore.

Before long a new lifestyle swallows up that new paycheck. The future holds only more expenses, homes in exclusive communities, expensive weddings, exotic vacations, and private school for the kids.

Perhaps, that’s why the Wall Street Journal recently tried to explain how a family could make $400,000 a year and still feel like it’s just barely getting by.

Don’t fall victim to the lifestyle trap

Yet, doctors are not alone. They’re only the most visible examples of lifestyle inflation. The illness affects us all.

There’s always something more, bigger, or better to swallow up our money. And before we know it, we’re spending every cent we’ve earned.

When we do get more money it’s gone as soon as it reaches our hand. The IRS refund finds its way into the salesperson’s hand to pay for our new flat screen TV. The end of year bonus – gone – spent on expensive Christmas presents. That pay raise at work, forget about it. It’s already spent on a new car, fabulous shoes, and a fancy dining room set.

And the more we make, the more our lifestyles grow.

The ultimate tragedy is that our increasingly expensive lifestyles become traps. We become slaves to our jobs because our jobs are the only ways to support the expensive, inflated lifestyles we’ve created.

So we all live on the razor’s edge, hoping nothing happens to our ability to pay the bills. In the process, we never create wealth, wealth that would ironically set us free.

But, when we resist lifestyle inflation and spend less than we earn, we have money left over to create wealth. For those willing to step off the lifestyle inflation bandwagon, the promise of true financial freedom becomes a reality.

Next week we’ll take a look at ways we can conquer lifestyle inflation for good and start building the wealth we deserve.

BMWK: Are you doing more to create wealth for you and your family?