Living well below your means
Do you remember when you got your first real job? Finally, you had money coming in the door. Heck, maybe you were even savvy enough to put together a budget to see how far that money would go once you started living. This budget probably acted as a tool to see how much you could spend instead of how much you could save. Our consumer economy has taught us that money is for spending. Your salary determines what you can spend to get stuff, not what you are able to save or invest.
I remember as a senior in college I landed my first “real job†and thought I would be smart and setup a budget before I started life on my own. My logic went like this…â€I am bringing home $2,200 a month. $200 will go to student loans, $200 for groceries, $100 for utilities, $100 for going out, $70 for a cell phone, $30 for internet. Ok, that leaves me with $1500 dollars to split between a car and an apartment. I can get a really nice apartment in Madison for $800 a month. That leaves me with $700 a month for a car payment, gas, and car insurance!â€
So what did I do next? You guessed it…I immediately went to the car dealership looking for a car that would have payments in the $400 price range and found an apartment for $800 a month. It wasn’t about what was really practical, it was about me stretching my budget to the max and “living†the best I could for the money. I had no thoughts of saving or the downside of locking myself into all of these expensive financial commitments. Does this sound familiar to you? If not, then you were wise beyond your years. However, I have a feeling that most people began life on their own like me.
Well it didn’t take long for me to realize that not having any money left over at the end of the month was not the key to happiness. I started to become more and more stressed and felt trapped by the “iron cage†of liabilities I was building. What if I lost my job? Would I be able to afford my car and lifestyle? Worse yet, what if I wanted to quit and work a dream job that paid less or start a business? Could I come up with the investment capital and still afford my lifestyle? The answer was overwhelmingly “NOâ€. I would have been up a creek if I lost my job and my entrepreneurial side began slowly dying. It was at this point when light bulbs went off in my head. I realized that the car I had bought (a Subaru WRX) was a great car that was fun to drive, but it got me from point A to point B just like any other car would, albeit maybe a little faster. It only took premium gas and didn’t have great fuel economy. In addition, the cost of gas was skyrocketing. It started to become a no-brainer; I needed to ditch the “nice carâ€. Then I thought about my apartment…â€$800 a month, that’s $9600 a year! What do I have to show for that $9600 when the year passes? Nothing…†This is when I realized the value of having monthly cash flow AND assets.
For the next few months all I was interested in was increasing the amount of money I had left over at the end of each month. To start I went to a car dealership to see what I could get for my car. I walked away feeling angry and dejected because they were definitely low-balling me. The old saying, “If you want something done right, do it yourself†couldn’t be truer when it comes to selling your car. I decided to post it on the classifieds at work and sold it the same day, for $4000 above what the dealership was willing to pay. I went online and found the cheapest, most fuel-efficient, reliable used car I could get for the money. The amount I spent on car related expenses dropped from $710 a month to $286, a total of $424 a month savings. This turned out to be one of the smartest moves of my life because I was able to get 103% financing for a house since my debt-income ratios were now in line. I bought a fixer-upper and saved about $100 a month compared to what I paid for the apartment. I also decided that I could eat fine by only spending $100 a month on groceries. After all the tweaking, I had $700 left over at the end of each month and I was building equity in a home. The joy I got from knowing that I could afford my lifestyle and take a $700 a month pay cut if worst came to worst, or if I decided my job wasn’t right for me, was incredible. Most importantly for my entrepreneurial mind was that now I was on the road to saving investment capital to make the jump into starting my own business.
So what can you get from my story? Take a look at what you are spending money on. Do you really need it? Does it make you so happy that you can live with saving less money each month? Are you building equity? Are you over dependent on your current job’s salary? Can you quit your job and do something you love? One of the most valuable things you have in life is freedom, freedom to say and do what you wish. If your lifestyle is hindering your freedom, then you are living beyond your means. It is not about what you can afford, or how others perceive your financial success, it is about living your life the way you want. Make your money work for you and you can begin to enjoy life.
Tags: Budget, save money, spend less