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Technically speaking
if you live $1.00 below your means every month, you are living below your means. Well, that was a short blog piece. I guess I don’t need to say anymore.
Nah, I think I’ll keep going because the topic of living below your means, means different things for different people. I’ll simplify this for you.
If you are in debt, you haven’t been living below your means.
If you are not in debt, then you have successfully lived below your means.
Congratulations, you get a scratch and sniff at the end of this blog. Good job! But—dare I say it—living below your means probably isn’t enough. Just because you’re maxing out your 401K, doesn’t mean you are living below your means—although that could be the case.
I’ll give you a rule of thumb, and this goes against everything that I believe in because I think people live by too many rules of thumb. Although I’m sharing my advice on living below your means, I certainly recommend you seek professional help to ensure that you reach your goals.
In any event, if I had to set a number to what living below your means, I would say you need to save 20% to 25% of your gross income.
So, if you make $100,000/year, you should be saving anywhere from $20,000/year to $25,000/year. Yes, it sounds like a lot, because it is. It isn’t as bad as you might think, though, and if you want to start reaching your money goals, you have to sacrifice.
What if I told you that I expect about $15,000/year to go towards your retirement and non-retirement goals and $10,000 should go into savings? Does that make the numbers better? Honestly, if you are not saving at least 10% annually, I don’t know how you are running your family.
I am not trying to insult you, I’m just saying. I already have gray hairs from these little girls in my life; I don’t know what life would be like if I didn’t have money automatically going into a savings account.
Let me remind you, putting 10K in a savings account doesn’t mean that you don’t get to use it.
You should have at least three savings accounts:
- Emergency Savings Account
- Pay Cash Account
- Travel Account – If you have debt, should you be traveling?
My recommendation is that you should always have $5,000 in your Emergency Savings Account. If you do not, you should dedicate the 833.333/month to get it to $5,000. Once you get that account to $5,000, then you can take the $833.33 and put it toward another account. Either the Pay Cash Account or the Travel Account. I, personally, would always have at least $50/month going to Emergency Savings Account, and I would split the rest between the other two accounts.
The Pay Cash account is my favorite account.
It is the least understood, but the most flexible. For today’s purposes, think of the Pay Cash account as a catch-all: need a new microwave—Pay Cash Account, need a new stove—Pay Cash Account. Christmas is coming, how much do we want to spend for Christmas, that’s right—check the pay cash account.
Imagine a world where you are a parent.
This is a world filled with children—accidents are bound to happen. For those of us who have children, you understand that with each child, the unpredictable coefficient goes up every time. I am spitballing here, but imagine if one of your children decides that it is a good idea to pee on the floor. You are trying to be a good parent; therefore, you will teach her that if she pees on the floor, she will have to clean it up. Just before, you can say, “NO STOP!” Your daughter puts all the paper towels into the toilet after cleaning up the pee.
Now, do you A) reach your hand in the toilet or B) try to flush to see if it will go down. You opt for B) because you don’t reach your precious hands into toilets. Let’s assume that the toilet was clogged so bad that you had to call a plumber. Does that come out of the Pay Cash Account or the Emergency Savings Account?
The simple answer is either one. I would personally take it out of the Emergency Account because stupidity is an unexpected expense, right?! I learned the hard way.
The point is, if you live below your means adequately, it will actually put you in a position to handle different situations as they arise. Also, if those accounts are getting low, then you have a better understanding of your family’s financial health. You’ll also get a better understanding of what you can afford.
So, what should you do now?
Well, if you are someone who isn’t living below their means, it is time to start cutting! If your spouse is not feeling your new idea of cutting their cable, then you need to cap your family. No, no, no—I don’t mean it like that. I mean, put a cap on the amount of income you contribute to the family. In other words, when you get a raise, you calculate the extra money that is coming into your paycheck, and you immediately—IMMEDIATELY—remove it from the checking account. Start hoarding some cash, my friend.
It is incredible to me how someone can go from $50,000/year to $60,000/year, and all of a sudden, cannot live without the extra money.
I just don’t get it.
However, it has happened to me, so don’t be embarrassed. This is why you have to do it fast. Jedi Mind Trick yourself into believing that you don’t really need the money; put a hex on yourself so that you never touch the extra cash. It works—unless one of your daughters thinks it is a good idea to lean back on your dining room chair, falls back, and then break it all to pieces. #kidsruineverything
You had eight chairs in the dining room; now you have seven. Well, we can’t have that; the chair has to be replaced—Pay Cash or Emergency? I would go for Pay Cash, or you could grab a folding chair from the garage and call it a day.
It’s time to start planning for the future.
My friends, please, try to live 20% to 25% below your means and seek professional help on how to allocate your funds.
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Photo by Gregory Culmer on Unsplash
