You always hear about living withing your means. What’s it really all about? Why do personal finance dudes always talk about living within your means. I think that living within your means is an interesting topic that deserves to be explored. I want to throw out to you guys what my thoughts are on living withing your means:
Spend realistically.
If you lose sleep over a specific purchase you probably shouldn’t have made it. What’s the point of making a purchase, if you can’t fully enjoy it after. I’m not about being a miser that never spends a dime. I fully believe in spending money consciously so that you don’t feel bad after the purchase.
Alright so you’re thinking, “define realistic spending, smartass.” In my opinion, realistic spending is all dependent on your income. It’s a tough pill to swallow, but the guy making $40,000 a year can’t drive the same car that the dude making $100,000 a year does. Once you accept this reality internally, you can become realistic with your spending.
Avoid lifestyle inflation.
We all want what we can’t have. Unfortunately, credit cards allow us to have what we probably shouldn’t have. I’ve been there many times. Why would I want the $15 t-shirt, when I can have the way more cooler $100 t-shirt? It’s really easy to come up with excuses and to justify spending. We’ve all done it.
“I finally got that raise. I deserve to buy a new wardrobe now.”
“My iPhone is old now, I need the newer version to improve my networking.”
Making more money allows us to have more money for the things we enjoy in life. I love making more money because I see it as a chance to travel more or to focus on the things that bring me immense pleasure. Unfortunately, an increase in income usually leads to an increase in unnecessary expenses.
Associate with people in similar financial situations.
It’s cool to have rich friends, but do you really want to be going to night clubs with a $50 cover when you earn $35,000 at your entry level position? I find that your group of friends will have a major impact on your financial decisions. Instead of living a life that you know isn’t right for you, surround yourself with positive and like-minded people that will help you on your financial journey.
Keep your old car as long as possible.
I just wanted to throw this in here. A car has gone from a necessity that allows you to get from point A to point B to a mega expense plaguing this generation. I would love to impress chicks by driving around in a BMW with Gucci shades on all day. Unfortunately, I don’t think any of these chicks would stay around after seeing my credit card bill. I’ve seen too many of my friends finance a car that’s completely out of their price range. As you graduate from college, progress through your career, and begin making more money, try to avoid buying that luxury car until your salary justifies it.
Any other tips for living within your means? Are you living within your means?
(Note: Don’t worry guys, I’m not turning Studenomics into a frugality blog. I wanted to touch upon this topic today, but in the coming weeks I’ll be writing more about the making-some-damn-more-money equation of personal finance.)
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Great article. It seems like common sense, but just because you see someone else driving a nice new car doesn’t mean that you have to. It is a lot easier to drive an old car when you think about all the money you save (sales tax, full coverage, monthly payments, interest on the loan, and an annual car tax in Northern VA)! My car is a ‘94 Accord, and it still runs great.
These are great tips, and I agree that they might be easier said than done. The inflation comment is really great, I wish I thought about it more before I bought the new iPhone..but I still got over two years out of my last one.
A couple of comments:
1. I have been driving the same heap of junk for the past 12 years. I actually started as a relatively new used car, but time flies…
Its days are numbered. I see a new car on my horizon.
2. I see nothing wrong with lifestyle inflation, provided that it’s sustainable, i.e. that you don’t rob your future self to pay for stuff you want today. I think the key is to live within your means, not to save more than you actually need to save.
You brought up an excellent point– “don’t save more than you actually need to. ” This is very true. I find that most newbies to the personal finance community will take extreme measures. People will go from driving a nice car to riding a bicycle around town. This is cool, but is it always sustainable?
What’s wrong with saving more than you actually need? You never know when you might be laid off or have an unexpected financial emergency. How about early retirement?
If those are your financial goals then yes that does make sense. As long as your goals are congruent spending, you’ll head in the right direction with your money management.
Realistic spending is the art of optimal effort exchange in the acquisition of a need or want. Bill Gates, for example, in the span of a blink of an eye earns enough to buy the $100 t-shirt, while someone else whom earns minimum wage has to work 15 hours. In the exchange, whomever has the highest ratio of satisfaction from the spend versus the amount of effort it took to acquire the item/service wins. This implies that the minimum wage earner could have the better of the deal, although that is highly unlikely.
The tip I would offer, to living within your means, is to always consider how much effort you put in to get something.As you become more efficient at earning money, and you exercise this efficiency, the realm of items within what is realistic will grow.
A very fair point. I believe that your spending should be directly correlated with your spending. If you make a boat load of money, I’m sure the $100 Ed Hardy shirt purchase won’t stress you out. On the other hand, at $15/hr, that $100 shirt becomes very expensive.
Watch the big expenses first (home & car) – keep them minimized. Like buy a used car for cash. When that wears out buy a slightly better used car for cash (you were making payments to yourself, right?).
Underspend on the house from what the ‘bank’ says you can afford.
Then watch the habits – daily starbucks, big lunches/dinners out every day, smokes, bar tabs.
Save 20% of your income, in a separate bank account that you have to manually go to the bank to get out (no ATM card). ‘Millionaire Next Door” prescription.
Saving $100/month from 25 to 35years old and then stopping will be more money by retirement age than $100/month from 35years until retirement, in regular interest rates. That’s comparing 10 years of pain to 25 years of pain.
Learn how to repair things. don’t just toss and buy new – it might be a simple fix.
You just summarized some of the most effective tips for getting rich! Thanks for sharing this with us.
Another important point is to plan for occasional expenses. We all know that the car is going to need repairs the month after next and the dog needs his shots every March, and insurance is due twice a year. Instead of having a really bad month and having to resort to charging stuff, just put a bit aside every month for these occasional expenses.
I completely agree with keeping your expenses tied to your actual income. When my husband and I were making a grand total of $30,000 a year, we lived in a 550 sq.ft. apartment for $399 a month. We didn’t buy our house until we had 20% down and were making $75,000 a year…living above your means will kill plans for the future and we had too many to risk.
Side note, planned lifestyle inflation is a key to a happy life. We spend a lot more now than we used to, but we save more too…it’s all about balance and priorities.
Planned lifestyle inflation? Hmm that sounds pretty cool. I do this once in a while. I start thinking about some of the things that I can do (travel more, help out more, etc.) when my income increases. At the moment I’m just trying to live a lifestyle that matches my current income. In the future I definitely see my expenses increasing along with my income.