Live within your Means.
I have been thinking a lot lately about this phrase. What does it actually mean? Most of the definitions I get back are simply “spend less than you earn” but I wonder if we have an opportunity to stretch that a bit further and create different levels of mastery around this concept.
Maybe there is a spectrum or maturity model to this concept as well – from gaining some control when you are struggling, to anticipating needs, eventually leading to freedom to just live. At all phases, the balance between more income and less spending remains and it is important to not let your guard down when you make improvements in one of both areas, becoming complacent and getting back to bad habits that would set you back.
In practice the spectrum is not always this linear and it is helpful to understand the end state soon so that you can adapt along the way. That said, when you are starting out thinking about all these things may seem overwhelming, so to me it often helps to frame my thinking in terms of stages so that I can start addressing things in chunks, continuously improving and adapting.
Level 1: First things first. If you are living paycheck to paycheck, you have some work to do. You really have to figure out where that money is going, and how much you are spending vs your income. The plan here is simply to get you to break even and out of an overwhelming situation. Here you may still have some leftover debt, but you have a plan to pay it off slowly, without adding any additional balance.
Level 2: Once that baseline is accomplished and you have some control and stability over your finances, it is important to focus on eliminating risk further. Here the focus should be on paying off your non mortgage debts and starting to work on an emergency fund so that you have some margin of error in case of an emergency.
Level 3: This is when things start to get a little more fun. It allows you to then start thinking about your wider goals and what you want to accomplish and when. Here, one can take a more holistic approach to financial management. For example, how much home can you afford ‘within your means’ is not just about your income levels or debt burden like some mortgage companies want you to believe, but about your entire financial picture. How much do you have left from your income after core expenses (inclusive or mortgage, insurance, taxes, utilities, home repairs, etc), plus savings and investments for what you want to accomplish, plus a rate that allows you an emergency and big ticket item replacement buffer. Only after knowing all of that you can decide what is the appropriate level of spending for different things on your list, providing a more sophisticated answer to living ‘within your means’ expenses.
Level 4: You feel like you have your financial management act together and you are able to focus a lot more on ways to maximize your investments, diversify and prepare you for independence! Here you start thinking more about contingency plans, other risks and expenses in your future that you may not have considered like long term care plans, healthcare without working, helping kids with weddings, etc. This may once again get you to reconsider what within your means allows for, and adapt. You start figuring out in more detail your withdrawal strategy for retirement.
Level 5: Financial independence. You did it! BUT you still have to keep your guard up and keep focusing on flexibility to adapt to the markets and other expenses that may come your unexpectedly. Job well done!
What do you think, where are you in the spectrum above and / or do you even think there is a spectrum? How do you think about living within your means?