Probably the single best thing you can do to create a stable financial situation is to follow a deceptively simple maxim: live below your means. The reason why is obvious when you think about it. Who's better off, someone who makes $1 million a year and spends $1.2 million? Or someone who makes $25,000 and only spends $20,000?
The problem is, our culture tells us to admire the first person. After all, he or she probably lives in a nice house, drives a fancy car, is at the coolest restaurants, and generally seems like a winner. Such appearances are deceptive, though. You can get away with this behavior for a while, but when a crunch comes - a time like now when credit is drying up and people want their money - you'll lose it all, and then some.
So we need to be consciously on guard against the hundreds of voices shouting "Spend!", and listen to the tiny interior voice that says "Save!" Here are a few big-picture ideas that I've found to be helpful.
First, consider the biggest-ticket expenses you have. For most people this will be your housing, and maybe also a vehicle, travel, vacations, etc. Think about why you're spending that money - does it align with your goals, and are there opportunities for savings? For example, maybe you live in a large house because you have (or want) a large family. Good for you! That's a perfectly fine reason, and you're putting your money to work for you. Ditto for tithing, which can feel like a large part of your budget, but reflects an important goal. On the other hand, maybe you take a vacation to Cancun every year. That's fun, but if your main life goal is to become a full-time painter, then maybe you can reach that goal faster if you give up the vacation, or start going to Florida instead.
A personal anecdote: For my first apartment after college, I rented a loft in downtown Kansas City. It's still one of my favorite places I've ever lived - large, open, with a great location for both work and entertainment. However, after several months I realized that I would want to save money to buy a place of my own, and had to decide whether the higher rent I was paying for the loft justified the extra time it would take me to acquire a down payment. Furthermore, I realized that while I did enjoy the location, I just wasn't taking advantage of the fun nightlife opportunities in the neighborhood. I reluctantly decided to give it up; after I made my decision, though, I didn't have regrets, because I knew that I was doing it for a good reason.
Second, look at how you actually spend your money. The best way to do this is to keep track of every single purchase you make for a month or two, including little things like buying gum, feeding parking meters or laundry machines, etc. If (like me) you have trouble with that, just collect your receipts, bank and credit card statements for a month or two, and every night before going to bed jot down your best recollection of the cash you've spent since getting up.
What this allows you to do is deal with actual data, and see where savings can open up. The trite example that people always throw out is how much money you can save if you give up a cup of coffee every day. That may be true; but if coffee is less than 1% of your expenses, then you might want to focus on other things first. And, again, as you look at your spending, think of how they relate to your goals. Are you drinking coffee because you're addicted to caffeine? It might be worth weaning yourself off. Are you drinking coffee because it's a fun social activity, and spending time with friends is important to you? In the latter scenario, you're putting money to work for you, and shouldn't feel bad about it.
Finally, in between the largest recurring expenses and the smallest recurring expenses is the zone where we can have the biggest troubles: special purchases. It might be a new stereo, a new bike, the complete works of William Shakespeare, an electric mixer, tickets to a Radiohead concert. Now, not every such purchase is "bad", but a surprising number will seem a lot less important after you bought them than they did before. Again, a huge part of the reason why comes down to our culture: we live in a society that craves consumption, that defines people in terms of what they own, and are bombarded with constant messages (from advertisers and peers) that our things aren't good enough and we need newer and better ones. Here are some strategies I use to cope.
First, I ask myself, do I need this? The answer is almost always no: I just want it. Since it's a want, it's a luxury, and I can decide whether or not to buy it.
Second, I ask myself, is it important that I purchase this right now? Just because I want something in my life does not mean that I must acquire it immediately. As a follow-up, I'll think about how buying the item now will be different than buying it in the future. If it's on sale now, it will probably be on sale again. This strategy is especially helpful for me, because so many of the items I crave are electronic, and such items invariably are replaced with better and cheaper models the longer you can hold out.
Third, I'll ask, do I need to BUY this? I love books, but whenever I can I check them out of the library; that probably saves me between $500 and $1,000 a year. If it's a fun game, can you borrow it from a friend for a while? If it's a tool that you'll use a few times a year, would it be cheaper to rent it?
Fourth, if at all possible, I'll try to wait for at least a week. Maybe after getting back from a friend's house I'm convinced that nothing could make me happier than a vintage Star Wars pinball machine. After a few days, I'm now obsessed with Rock Band. I'll feel much better about buying Rock Band if I don't have that pinball machine already standing in the corner.
Fifth, and most importantly, think back to your goals. Does this directly apply to one of your goals, or is it just a creature comfort? Now, I'm not saying that you should never have fun and never splurge, but constant splurging can quickly prevent you from doing what you truly want.
If, after you've trimmed out all expenses except necessities and requirements for your personal goals, you're still running a deficit, then you'll need to re-visit your options for generating income. Deficit spending will require more and more of your time, attention, and energy to correct, which puts you further away from your goals. Worse, it's putting money in charge of you.
Now, it isn't unusual to dip into negative territory, especially when starting out or reacting to circumstances beyond your control (like downsizing, a medical crisis, etc.). But absent such crises, you should be cutting even or saving money, especially if you hope to retire some day. Since you can only cut expenses so far (we all need a place to sleep, food to eat, and clothes to wear), a new job or other income is probably part of the solution.
If all goes well, by now you are getting money from a job, and spending enough to meet your most important goals, while accumulating some extra money. Congratulations - isn't that a wonderful feeling? Now you need to decide how to handle that money. The next section will deal with cash flow - parking your money and moving it around. Stay tuned!
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