It’s true. More often than not, we shaft our future selves by making unwise or non-optimal choices today. Do we all live above our means? What exactly is “living above your means?” Living above our means is more than simply running out of money before each month ends. Honestly living within our means involves incorporating all of our values, future goals, risk, and future cost/spending into our current level of consumption.
It is certainly possible to earn a little more than we spend but still be living significantly above our means. Living paycheck to paycheck, consumer debt, and lack of emergency savings are outward expressions of over-consumption. However, I’ll make the argument that the subtler signs like inadequate future planning, being under-insured and failing to financially prepare for post-working years are all ways we mortgage our future interest for current consumption. In addition, our desire for more stuff (& money) often causes us to work more hours and spend more time away from the people we care about than the return we actually get from additional consumption. Understanding and evaluating the full consideration of our current and future needs will allow for proper planning about how to integrate all of our living costs into our current financial decisions.
The Flashing Red Signs
I’ve often written about credit cards and the fact that Visa is smarter than you, but I still get quite a bit of push back when I suggest to people that “needing” a credit card for emergencies is a major red flag. In general, debt of any kind is simply a trade-off between future payment and immediate consumption. We are hard-wired to desire immediacy and we often sacrifice our future goals and ideals for the fleeting sensation that current consumption gives us.
Pro Tip: Emergencies will happen to you. We all need to plan for them. After counseling hundreds of families over the years there seems to be a common theme that a specific event puts a household over the financial edge. These are often sad and unexpected (well, not anymore- you have been warned) events that dramatically influence the financial picture. However, more often than not, adequate planning and risk management could have removed the financial pressure from often tragic events. Positioning yourself or your family at a place where you are financially close to the edge suggests that you are actually living above your means.
Borrowing money for cars, cell phones, gifts, vacations, or everyday expenses (and to some extent houses and education) are often reflections that we are simply unwilling to adjust our expectations and spending to our current situation. We feel compelled to eat fancy food, give expensive gifts, drive reliable cars, or live in houses we can’t afford. In fact, we are often so good at rationalizing and keeping up with the Joneses we fail to realize our drift towards more. The red flags are easy to recognize.
The Subtle Signs
We all want to be well prepared for the future. But preparing for the future often necessitates the need to make preparations today. The subtle signs of living above our means are much easier to miss and inadequately prepare for. They require thought and a consideration about our future goals and lifestyle. Living within our means includes anticipating future consumption and integrating it into our spending plan. After moving past the basics of having an emergency fund, balancing our income and expenses, we move onto a higher order of planning. It involves saving and anticipating near and long term needs for capital. Our cars will break down, our bodies will get sick, our homes will need repair, and we are likely to have breaks in our income over the course of our lives. Eventually we will be unable or unwilling to work for income and need stored assets if we wish to maintain a constant level of consumption.
Some people like to simply save a portion of their income as a slush fund for future unknown expenses. I like that idea. But I also like the idea of running our household like a small business. That means planning and creating sinking funds for known (or simi-known) upcoming expenses. Realistically, this includes allocating a portion of our paycheck each month to a future vehicle, retirement funds, large home repairs (our ailing plumbing and air conditioner), health care and deductibles, gifts/Christmas, kid’s college, and travel. A friendly reminder that if we only save 10% of our income for retirement, we will need to work 50+ years to replace that income after work.
What we find in the counseling world is that when we integrate many of the known upcoming expenses into our budget we often turn a slight monthly surplus into a monthly deficit. The trickiest part about irregular and time-unknown expenses is that they often give us the illusion that we are in better shape than we actually are. To be financially sound, we must incorporate future expenses into our current planning process. If we refuse to acknowledge the inevitable, we will only set ourselves up for under-funded future emergencies or an unwarranted reallocation of our proprieties driven by the need for money.
I’m a pretty big fan of self-insuring, there are many times where adequate insurance can be a stop gap until we have a nest egg sufficient to cover the cost of emergencies as they arise. Evaluate your personal needs for health insurance, automotive insurance, long-term disability, life insurance or LTC, depending on your stage of life and how much you have saved for the future.
Developing a Plan
I love being able to spend money freely. I enjoy the feeling when I have plenty of money allocated to something I really like. It feels even better when I know I’m not robbing peter to pay paul. When our minds are unclear about questions like: ‘Will I need this money for something else soon?’, it actually makes it harder to enjoy the money we do have to spend on items and experiences we love. I enjoy the process of thinking about the future and planning ahead so our family will be well prepared financially for any situation or opportunity. We will continue to automate our savings, build sinking funds for known expenses, and spend freely on the funds we have allocated for our own entertainment. We’ll try to live within our means.