Living Below Your Means

Iím about to reveal a secret that everyone already knows. The problem is that either they donít know they know it or they just donít believe it. Are you ready? Here it is.

You will have more if you spend less.

Shocking I know but itís true.

Be a late adopter. Buy the not so latest and not greatest. But not the cheapest. Balance is the key. The longer things last the less they cost. You donít need a new car. The house is big enough. Work toward a goal.

That last sentence is the most important. Without goals, spending and the overall management of money is willy-nilly. You want something? Well too many people buy whatever they want without regard to how that purchase is going to affect anything else because there is nothing else, just the moment they are in.

Sure you might want to retire early (no one wants to work until theyíre 72) or buy that dream house, but without a specific goal that desire is just a dream and probably a pipe dream at that.

Realistically one goal is not enough. I mean if all you want is a big house with lots of stuff you might get it but at what cost? Maybe youíll have to work long hours for more years than you really care to or perhaps getting that dream house will leave you vulnerable to financial ruin if something tragic were to happen. Sure you have your dream house but it wasnít enough. In order to succeed you need to focus on the goals without loosing sight of the big picture.

The question that begs to be answered is: What is the big picture? Well itís different for everyone but includes basics like enough liquid assets to overcome temporary hardships like a layoff or unexpected medical bills. The big picture might also include freedom, freedom from working at a job that you hate. If I were miserable at my job (which Iím not) I could quit, knowing I have enough money to hold me over until I found a better job, can you?

There also has to be balance. I have quite a few goals but I have to prioritize them and understand that I might not achieve all of them. I also have to accept the fact that I just might not be willing to accept the risk required for a specific goal. I really want to open a restaurant but the difficulty of that task is something Iím simply not ready for and so I put it off. Thereís nothing wrong with that because I havenít given up, Iím still working toward the goal without risking the other aspects of my life that I value.

The key to all of this, to working toward your goals while keeping the big picture in focus, is spending less than you make. Put another way you can call that saving but for some reason that word scares a lot of people. We Americans just arenít savers, weíre spenders or as economists would say, consumers. So rather than telling you to save more Iíll tell you to spend less. Evaluate every purchase as if it will break the bank, as if that new computer or new HDTV will push you over the brink and into poverty. Iím not kidding.

Perhaps youíve heard the phrase live below your means (LBYM)? Thatís really what Iím talking about. Living below your means allows you to save, invest and get ahead. But I also see a downside to that phrase. Living below your means sounds like you canít keep up, like you're falling behind, drowning in financial quicksand falling farther and farther below your means. Well thatís not true but Iím going to avoid the phrase and stick with spend less than you make.

I, like my fellow Americans (mostly male Americans), love cars. I can spot the make and model when itís just a dot in my rear-view mirror and if itís a rare and exotic car my heart beats a bit faster. I have a sports car that I rarely drive, especially in the winter. Itís washed, waxed and detailed several times a year. But this wasnít always the case.

I credit my parents with teaching me the following lesson and my wife for not letting me forget it. I lived in a wealthy town when I turned 17 and got my liscence. Other students in my highschool were getting brand new BMWs or Mercedes when they got their liscence but even if my parents could afford it, there was no way I was getting one of these. No I had to pay for my car out of my own savings and make the payments from money I earned.

After a failed purchase of a used Firebird my mother and I decided that a new car would give me the mechanical stability I needed. A new car for me was going to be much different than the BMWs my classmates were getting. I was going to get a Hyundai and while they have come a long way since then, in 1988 they were junk for lack of a better or more tactful word.

My father was not as pleased with our choice of car, however, saying that once I bought a brand new car there was nowhere to go but down. I understood the folly of that statement (it was a Hyundai there was nowhere to go but up) but I also understood his point. By starting out with a new car I wouldnít appreciate the work it takes to afford a new car.

Well five years later after spending almost as much as the car originally cost in repairs it was time to give up and buy a new car. I was just about to finish college and really didnít have much in the way of job prospects but I went out and bought a brand new (again) Honda Civic hatchback. My parents were not pleased. How was I going to afford this?

Well I finally convinced them it was the right decision and I bought the car in April of 1993. This was basically the least expensive Civic available from Honda (I did get the DX package which included a passenger side rearview mirror Ė what a luxury).

Five years later in the spring of 1998 I was living with my future wife and began talking of getting a new car but she was adamantly opposed. Thereís nothing wrong with the car so why spend the money. I couldnít argue with that. It would be five more years of whining before I would even get her to come to a dealership with me. As we spoke with the salesman at the Infiniti dealer I mentioned that I was in no rush to buy a car seeing as Iíve waited so long since my current car was purchased when I was still in college. My wife hadnít realized that fact and with that revelation she gave me permission to get whatever car I wanted. I signed the papers the next week and got the sports car Iíd waited for since I was 17.

The point of this long story is that by waiting as long as I did I spent years without car payments. Whatís even more important than that is that I saved what would have been going to car payments all those years. In other words I spent less than I made. Because of this I paid cash for that sports car.

Over the 10 years that I owned that Honda those kinds of choices were normal. I bought a house and furnished it with hand me down furniture or when I had no choice but to buy new, I shoped at places like Ikea. I never felt deprived, knowing that saving was more important than spending. And when I did spend money I spent it on things that were more important to me such as vacations. Every decision was a choice, nothing was purchased on impulse.

Such a small change, thinking carefully about purchases, every purchase, can be enough for you to catch up or even get ahead. Give it a try.