Last week I wrote about finding money to invest, which was simply to create a saving’s “expense” every paycheck and be disciplined enough to maintain the habit and never touch the money. This week I would like to discuss living within your means. What does this really mean? Simply put, if you’re living within your means, you can pay for the things you NEED without getting trapped in more debt than you can handle. I would go even further and state that you should avoid debt altogether if at all possible. I would define a NEED in this context as something required to be purchased for survival – e.g., food, shelter, utilities, education, transportation and clothing. A WANT is almost everything else (e.g., cable television, iPhone, etc.), as well as, going beyond the minimum to meet a NEED (e.g., luxury car, designer clothes, etc.). Although I do understand that large purchases such as homes, cars, and education are sometimes necessary, although for me personally, I would avoid or minimize going into a large amount of debt for these items. So instead of the $500,000 mortgage for a 3,000 square foot house, unless I knew I could pay this amount off within a few years (i.e., less than 5 years, not the customary 30 years), I would be much more conservative and obtain a $150,000 mortgage for the 1,000 square foot house. Instead of the $30,000 SUV, I would buy a reliable used economy care for half the price and drive the car until the wheels fell off. Instead of attending a pricey private university and shell out $50,000 a year in tuition, I would attend a reputable public university at $10,000 a year. If you can pay cash for the $500,000 home, $30,000 SUV, and a brand name university degree, then by all means, buy them and enjoy the fruits of your labor (or trust fund). But if you are borrowing to finance these items at these price levels, then I would venture to guess that you are probably living beyond your means. Also, I would never go into debt for any other items than the three I just listed and be very careful that WANTS don’t end up becoming NEEDS and develop a clear sense to distinguish between the two. When someone makes these big purchases that are beyond your means, they are also buying into a lifestyle where human nature will kick in and they will be in the never ending cycle of trying to keep up with the Joneses.
One of the fundamental tenants of building financial wealth is living within your means. If you are over leveraged and are financing a lifestyle beyond what a paycheck allows, then financial freedom will always remain an elusive dream. Once debt begins to snowball, it takes many years, if not decades, to dig out.
At a young age, for whatever reason, I have always been conscious of the utility derived from a purchase decision. I have always been practical, frugal, and held a long term view when making any major purchase actions. For example, when I went off to college, I decided to attend a public university because of the bargain in-state tuition rates and as a result borrowed very little – I think I graduated with about $2,000 in student loans. When I bought my first house, I bought the cheapest lot in the neighborhood and paid extra every month to pay off the principal as soon as possible. I have only financed one automobile in my life, a new Ford Ranger back in 1995, and the debt bothered me so much I ended up paying it off within a couple years. I have paid cash for every vehicle since then. Beyond these expenses, I have never gone in to debt for any other item. I do use a credit card for the convenience, but pay it off as soon as possible. In fact, I’m so anal about credit card debt, that I check my balances every week and pay it off immediately. I guess I’m a bit quirky in this way, I just don’t like owing anyone money, but this personality defect has served me well.
Avoiding debt and living a lifestyle well below my means over the past two decades has put me on the path to financial freedom. I easily save more than 50% of my salary every year and still have what I consider a very comfortable lifestyle. In fact, as I get older, I prefer having less stuff, which is allowing me to save more than I ever have. There are a number of great minimalism blogs I have followed over the past couple years and I’ve learned that we don’t really need a lot of money for contentment and removing the clutter from our lives not only reduces what we once considered NEEDS to WANTS, but also helps detach oneself from our consumer society. Many of us have become numb and take what the media, culture, society or even relatives throws at us at face value without question, and we’re programmed to believe the big house, expensive cars, and latest gadgets are NEEDS, rather than WANTS, which ultimately enslaves many us through unnecessary debt.
So my advice, for what it’s worth, if you just can’t seem to find money to save and invest, most likely the level of debt is where the problem exists. To get control of debt, a person needs to clearly define their true NEEDS and WANTS (and begin eliminating some of the WANTS), and from there, the debt can be worked down to a manageable level ultimately creating the wherewithal to begin saving and investing for the future.