Last week I presented a list of tips for keeping your financial boat afloat. The first and most important of these was living below your means and this week I'll elaborate on this topic. Great, you may be thinking, does this mean I can't see that wonderful new movie1 I've been waiting for? No, not at all; read on.
The Fine Print
The articles in this series do not offer specific financial advice. Instead they will present financial tips, with occasional smart-aleck observations and commentary, that may or may not be useful in the reader's particular situation. You should always seek advice from a professional who is familiar with your specific circumstances before acting on any of the information presented in this series.
'You've Got to be Kidding!'
That's a fairly common reaction to the suggestion that people should live below their means and there are a couple good reasons for it. For one thing, a person's income may in fact not cover their expenses. There are plenty of jobs out there that just don't pay very much or provide benefits. Benefits such as health insurance are particularly important in the US where we don't have a national health system. You get sick, it's gonna cost you. Or a person may lose their job. And children are a never-ending source of expenses. In cases like this, just living within one's means seems like a victory over the forces of darkness, never mind saving anything for a rainy day.
The second reason that people may have trouble living within their means boils down to their attitudes toward money. You would think that people described in the previous paragraph would be in worse shape, but it's often the case that people's attitudes are the least amenable to change. It's no coincidence that the number one source of marital trouble is money. People grow up with a certain set of expectations and assumptions and they generally figure that the whole world thinks the same way. It comes as quite a surprise, then, when they find themselves married to someone who just doesn't see things their way. 'Irresponsible!' accuses the spouse who likes to budget. 'Boring old stick-in-the-mud!' says the spouse who figures that money is for spending. Unfortunately both feel that their attitude is the 'proper' one; hence the conflict.
And in fact, people's attitudes toward spending are in large part emotional, not logical. A dedicated saver is often motivated by the need for security. Spending everything he earns is not only not pleasurable, it's downright painful. The person who loves to spend can't see the attraction of money sitting in the bank; I mean, what's the point? Given this, it's understandable why negotiation and compromise are so difficult, as the two literally can't understand the other's point of view. For both groups, it helps to remember that these differing styles are not character flaws, just as being introverted or extroverted is neither bad nor good. They're just different. It also helps to remember that people can modify their behaviour, but they won't be able to completely change their basic natures. So mutual incomprehension accompanied by a certain amount of compromise is a good outcome.
A Culture of Entitlement
Exacerbating a person's inclination to spend everything he has are the messages delivered by advertisers trying to get their hands on his money. To hear them tell it, people who buy the products they are touting are intelligent, attractive, savvy, and too cool for words. Not only do people want these products, they need these products, they deserve these products. And that's a pretty seductive message. You can't blame someone who's working his life away for thinking that he deserves a reward for all the misery he endures. The latest electronic gewgaw looks a lot more entertaining than a fatter savings account.
So here's another of those emotional money issues that people have to confront: saving money can feel like deprivation. Unless a person is the type who loves saving and investing his money, it's just not going to be much fun.
However, there's no escaping the bottom line. If you spend more than you earn, you will eventually get yourself into trouble. It's no different for you than for a business; if there's consistently more going out than is coming in, the business will fail. So you're going to have to grit your teeth and just do it.
Next we'll look at some ideas to help make the process less unappealing. This week we'll look at some ways to motivate yourself. Next week we'll look at some practical tips to stretch your income and reduce expenses.
Tip #1: Don't think of saving as deprivation. Think of it as buying yourself something: more choices. Having some savings to fall back on means that:
An unexpected job loss or illness won't leave you living on the streets.
You won't have to work until you die.
You'll have a better credit score, allowing you to borrow money at a lower interest rate.
Money in the bank gives you more options.
As I'd mentioned last week, a person who lives paycheque to paycheque is one paycheque away from serious trouble. Job loss and illness are the top two reasons that people declare bankruptcy. Without a nest egg to draw on, they fall into a financial hole that they can't pull themselves out of.
It's a sad fact that the people who can least afford it end up paying the most. And this makes a big difference if you're trying to afford a big-ticket item like a house.
For example, if your job is intolerable, you can just walk out and not starve while you're looking for a new job. You can start your own business and work for yourself, if you're so inclined. You'll have access to better health care (this one is really annoying, but there it is.)
In short, life is unfair, and it's even more unfair for those without financial resources. You end up with the short straw often enough through no fault of your own; it seems unwise to deliberately choose the short straw yourself.
Tip #2: Use payroll deduction to have a portion of your paycheque directed into savings.
You'll feel less deprived if you don't actually get your hands on the money in the first place. In the US, many employers offer various plans that allow employees to save money for retirement. Even better, the employee does not have to pay income taxes on the money in the plans until he actually withdraws it. So if Joe directs, say, $100 per paycheque into such a plan, he will see his take-home pay fall by maybe $75 (the actual amount depends on his tax bracket). And finally, many employers match an employee's contribution to such plans; this is free money. So using our previous example, Joe may be able to save $200 per paycheque, yet his take-home pay will fall by only $75. This is such a good deal, it's hard to believe it's legal.
If your employer doesn't offer such programs, you can create your own. In the US we have something called Individual Retirement Accounts (IRAs) that are available to anyone with earned income (ie, wages). To make your contributions less painful, you can set up an IRA that automatically deducts a set amount of money from your bank account each month. As with the plans described in the previous paragraph, the money in these accounts is free from income taxes until the money is withdrawn.
As you can probably tell by now, I consider money management primarily a mind game. All things being equal, the person in good financial shape is the one who decides to put himself there. Knowledge is important, but it's also easily come by if you're motivated, and the Web is full of free resources. If you're not inclined to learn all the ins and outs of finance, you can buy good advice. In the end, though, it's a person's determination to spend less than he earns that makes the difference.
Next week: less theory, more practical suggestions.