Posted by Tim Stobbs on February 23, 2011
This is a guest post by Lauren Bailey.
Many of us would like to think that if we could only earn more money, we’d be so much further ahead with our financial goals. While this is technically true, the money-savvy know that it’s not how much money you earn that leads to financial independence–it’s how much money you keep. Even lottery winners have been known to go broke or even end up in debt after squandering their financial windfall.
When will it ever get through our collective psyches that we don’t have to spend every dollar we bring in? If any of us are going to retire early like we hope, we must start taking significant steps to live below our means. The idea here is that the less we spend on everyday stuff, the more we will have to sock away in investments and savings and the more we will have available to pay down debt.
Establish a Budget—and Stick to It
Most of us who are at least somewhat money-conscious know more or less where our money is going every month. We often let our online checking accounts do the budgeting for us. But have we actually established a budget for discretionary spending? I’m not just talking about a token budget, where we say we will only spend $150 on dining out each month and wind up spending more like $350 on dining out each month. I’m talking about a budget that serves as a map toward your financial goals. This budget should have firmly established priorities for savings, investments and debt repayments that don’t get de-railed by impulse purchases of shoes and tech toys, as well as firmly-established boundaries on what you can spend on frills. You’ll know it’s not a token budget when your spouse asks if you want to dine out, and your response is yes or no based on whether it’s in the budget rather than whether or not your stomach is rumbling at the moment. To help us stay on task, my husband and I have arranged for sizable automatic withdrawals into our savings accounts and I have a bank draw for my investment accounts.
Run Your Car into the Ground
Do you really need a new vehicle every two to three years? Remember that the only way to really get your money’s worth out of a car is to run it into the ground—or driving it until the money it would cost to repair the vehicle is more than its current value. Maintain your vehicle well, and aim to drive your car long after you’ve stopped making payments on it. Don’t fall victim to the “three-year itch” when it comes to vehicles. It pays to do some research and invest in a vehicle known for its reliability and longevity. My husband and I both drive 2006 Hondas (he drives an Accord and I drive a Civic). Right now we benefit from excellent fuel efficiency for our commutes, and we won’t replace either vehicle unless way down the road we have to spring for a massive expense like a new engine or transmission.
Don’t Buy on a Payment Plan
Just don’t do it. Save for what you want and pay cash up front (using a debit card with the money there in the bank) or buy with a credit card that you have the ability to pay off at the end of the month (again, with the money already in the bank). This gets you out of the cycle of tacking on more debt.
Stop Competing with Your Friends
Finally, it’s tempting to buy the latest gadget that your friend just purchased. If he just purchased a gas grill, suddenly you find yourself looking for a gas grill. If he just purchased a larger flat-screen TV, suddenly your flat-screen looks a little too small. Don’t fall into the trap of feeling that you have to “keep up” with your friends. Be content with what you have and don’t replace items around your house unless you absolutely must.
These are just a few practices my husband and I have put into place as we strive toward financial independence. What ways do you live below your means?
This guest post is contributed by Lauren Bailey, who writes on the topics of online colleges. She welcomes your comments at her email Id: blauren99 @gmail.com.