Live Within Your Means

In preparation for the release of the audiobook version of Live Well, Grow Wealth, I'll be sharing excerpts each week on this blog. 

This excerpt is from Chapter One, Live Within Your Means. First, you have to look at the big picture: 

There is no such thing as unlimited wealth. Even the developers in Dubai learned that lesson after the global financial meltdown of 2008. One catastrophic spill can wreak havoc with the fortunes of a titanic oil company. Famous real estate moguls have declared bankruptcy. 

No matter how much money you earn, if you spend more than you have, you will run out. The converse is also true: no matter how little you earn, if you spend less than that, your wealth will grow. It's simple arithmetic. 

Think of certain professional athletes who rose from poverty to snare multi-million-dollar contracts, yet found themselves penniless within a few years. Or lottery winners who quit their jobs and proceeded to fritter away their fortunes. Contrast the retired school teacher with a modest home who left millions to her favorite charity. The difference: the teacher lived within her means. 

Not having enough money to meet your needs and live the way you want is stressful. It can cause health problems. It can ruin a marriage. Some people are tempted to violate the law, or fall victim to get-rich-quick scams, trying to take a shortcut. 

Every time you turn around, someone has a hand out. The prices of basic necessities rise, but your income may not keep pace. Your possessions break or wear out, and must be repaired, replaced, or updated. The best-laid plans can be thwarted by an emergency expense no one could have foreseen, or a catastrophe that was not your fault. How can you possibly live within your means? 

The first step is to know exactly how much is coming in, and how much is going out. If you hire a financial planner or credit counselor, he or she may tell you to write down every penny you spend and receive for a specified period of time, and then make a budget: the dreaded "B" word. I must confess I never did this. 

The closest I came to budgeting was when my future husband and I purchased a house together. He had money for the down payment; I did not. I had a job, though, so I agreed to pay all our utility bills and buy the groceries after we moved in, in addition to my share of the house note. We kept a log of our household expenses and I'd deduct his half each month from what I owed on the down payment loan. 

We still handle our expenses this way. Periodically, we tally everything up and he transfers money into my account for the difference. Once we went to a financial planner and she asked me about our budget; I was able to produce one from this expense log, our bank statements, and our credit card bills. 

Whatever method you choose to document your big financial picture is fine; the goal is to understand what money is coming in, and what is going out. Writing down every expenditure and then creating a budget works for a lot of people. 

Once you've figured out how much is coming in and how much is going out, it's time to start analyzing. If more money is coming in than going out, you're in better shape than most. If you have more money going out than coming in, the faster you take steps to reverse the situation, the better off you'll be. The magic of compound interest and wealth-building principles are working against you. 

So how do you do that? 

Can you increase what is coming in? Ask for a raise or apply for that promotion. Take advantage of some overtime. Get a part-time job or start a business on the side. Send the kids out to solicit yard work from the neighbors. Re-structure investments or tap an asset. Organize a big garage sale or start selling your treasures on eBay. 

For most people, it's not easy to increase the "coming in" column, and some of those solutions might only be short term. For example, once you've sold all your valuable possessions, if you're still spending more than you make, then what? Therefore, it's more effective to concentrate on shrinking the "going out" column. 

First, classify your expenses as absolutely necessary, necessary but reducible, discretionary but important, and totally unnecessary. 

Absolutely necessary, non-negotiable expenses probably include your rent or mortgage payment, and other fixed costs like insurance premiums, union dues, tuition, and taxes. Necessary but reducible might include utility bills, gasoline, clothing, and groceries. Discretionary but important expenses are not necessary for survival but add value or pleasure to your life: travel, cultural activities, magazine subscriptions, entertainment, toys, pampering. Totally unnecessary expenses eat up your income and add no value to your life: late fees, fines, excess interest on credit card debt.

To learn more, read Live Well, Grow Wealth by Sharon Marchisello.

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