Saturday, June 24, 2017

Myth #2- You Should Live Within Your Means

Living within your means is the mantra of the conservative side of the financial world.  I know all those who say this mean well. I have even said it, but the problem is many see this as the financial ideal.  And here in lies many of Americas financial problems.  Living within your means is not a wonderfully lofty goal.  In fact, it is a clear way to financial stress and ruin. 

The problems with the “Living within your means” philosophy is multifaceted and I will seek to dissect a few of these facets.

The first problem is that is sets the bar way too low.  We see our goal in life to get to this great time when we will live within our means.  Since that is the goal we always see it as okay to postpone.  It’s the goal not the necessity. So, we get ideas like, “I will live within my means when I am done with school, when I get my next promotion, when I get my professional license, when my kids move out, when my kids get out of college or when my wife goes back to work.”  We are always one raise away from the great goal of “Living within our means”.  Which ties closely to myth #3- Making more money will improve my financial situation.

I wonder when this phrase came along, because you don’t have to go too far back when living within your means wasn’t a goal, it was a necessity. It wasn't, "you should live within your means." It was, "Thou shalt live within your means." For so many what was the floor of our grandparents is now our ceiling.  The idea of “I don’t have the money, so I won’t buy it” has turned into “someday I will have the money to afford what I’m currently buying”.

The second problem is what many define as “Living within their means”.  For many people living within their means is another way of saying, “living paycheck to paycheck.” See many people say, “I live within my means but I had to take debt because my car broke down, I needed a root canal, or I got furloughed from work.”  To these people the concept of living within their means is that their fixed expenses equal their fixed income.  Living within your means should not mean your fixed expenses equal your fixed income because that leaves no room for emergencies which will eventually happen.  Because living includes all those things they are part of your living, the problem is many of us don’t make all our living part of our financial plan.  This leads to excessive stress whenever these unplanned instances occur.

But even if you do include some for emergencies you are not necessarily fully “Living within your means”.  Why? Because you may be living within your means for this week or this month but let’s take a much bigger view to think about what truly “Living” is.  See, life starts at birth, I know this likely doesn’t surprise anyone.  But once you are born your life starts and lucky, for most of us, someone else, picks up the tab for the first 18, 20, 25 or even now sometimes, 30+ years.  At some point most of our parents will have enough and we either leave or are escorted to the door.  For many of us that means some form of education or training.  Rather than work to pay for this, or all of it, most Americans choose to have someone else pay for this period in their lives too, promising that someday when they’re making the “big bucks” they will pay it back.  So now you’re 25, 30 or 35 depending on how much education you got or how much you dragged your feet, and are prepared to live on your own/pay your own way.  Most Americans at this point do not start “living within their means” because after all they are just getting started but let’s say for argument that you do.  

You are 25 years old and you now have a point where you can earn equal to what it cost to sustain yourself.  So you do this until 65 or in other words you put in a good long 40 year career.  You decide to retire and have Social Security, Medicare and a pension pay for your expenses until the day you die at 90 years old.  So in our circumstance you lived 90 years and worked for 40 to pay your own way and let others cover you for the other 50.  “Wait a minute”, you’re thinking.  I paid into Social Security and all those other things so I am covering myself.  Yes and No.  Yes you paid into them, but if you live 80-90 years you will take out far more than you put in, that’s why those programs are going broke.  The same great math minds that want to work for 40 years and get supported for 50 set up those programs and are finding they don’t work. 

So what’s my point? If you truly want to live within your means then you need to earn and put into society as much in the 40 or so years you work as you took out in the 90 years you lived.  And I don’t know about you, but I hope to put more into society than I get out.  I realize just because you’re not working full time doesn’t mean you’re not giving anything to society and money is only one measure of contribution, but you get my point.  Truly living within your means does not mean that you earned as much this month as you spent.  Truly live within your means, means earning far more than you will spend, especially during your most productive years.  Also, hopefully you have enough to do what your parents did for you and pick up the tab for someone else for the first 18 to 30 years. 

So, by most people’s definition we need to be living far below our means, that is the real financial goal. I believe that is the secret to success and low stress in your financial life.

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