I read an article recently written by an author who described himself as broke.  He has written several books that have sold well.  He has a decent income.  But he has nothing to show for it.

I read another article written by a woman who makes less than the national average salary, yet she has a substantial amount of savings.

The difference between these two people is that the first person lives above his means, and the second person lives below her means.

File May 17, 3 02 00 PM

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What does “living below our means” mean? (No pun intended…)

What it means for me is that I am supposed to spend less than I make.

I make some assumptions when I say “living below our means”.  The first is that that requires some income from some source.  It may be a job, it may be Social Security, it may be income from investments.  But whatever the source, there needs to be some source of money.

I also need to know how much income there is.  That probably sounds obvious, but I know people who have no idea how much money they make, and how much they have.  They are not conscious about it, and as a result, money slips through their fingers.

The other assumption (and this is a difficult one) is that I have to know exactly how much money I spend.   In order to “live below my means”, I have to spend less than I make.  Which means I have to be aware of how much I make, and how much I spend.

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Once I know how much I make, and how much I spend, I can calculate how I am doing.  So for example, if my take home pay is $100 a week, and I spend $48 a week, I have $52 a week left over to save and invest.

But if my take home pay is $100 a week, and I am spending $105 a week, I am spending more than I am making, and I am in trouble.

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You probably read the last paragraph and thought “that is the most obvious thing in the world”.

Maybe it is obvious to you, but it isn’t obvious to everyone.  A recent Federal Reserve Board study found that half of all Americans do not have $400 saved for an emergency.

Read that again- half of all Americans don’t have any savings.

Which means half of all Americans are not living below their means.

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My first reaction might be “we all need to make more money”.  But making more money isn’t the answer to this problem.    The problem isn’t how much we make.  The problem is how much we spend.

Go back to the original examples.  The author who makes a lot of money is broke.  The woman who makes less than the national average has substantial savings.    One of these two people is a spender, and the other is a saver.

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How does my family live below our means?

We decided a while ago to cut several things out of our lives.  TV, for example.  We do not watch any television.  (OK, I watched a little bit of the NCAA Final Four, and part of the Super Bowl, but that is it over the last 4 months).  That means that we don’t watch any commercials.  The point of commercials is to convince me that I need to purchase stuff.  Since we don’t watch TV, we don’t watch commercials, and we don’t purchase stuff we don’t need.

We don’t eat out much anymore.  We cut that out of our lives several years ago.  We do go out for birthdays and anniversaries, but we only eat out maybe 1-2x a month at most.

We brown bag our lunches for work and school.  Four lunches a day, times five days a week, is 20 lunches a week that we brown bag.  I estimate $7 per lunch.  That is about $7000 a year we aren’t spending on lunch.

Most importantly, we pay our credit card bill in full every month.  This is really important.  Credit cards are a suckers game.  Credit card interest can be as high as 20%, or more.  That means that a $1000 television purchased on a credit card may cost as much as $5000, once the credit card interest is paid.  The TV might look good at $1000, but it won’t look so good $5000 later.

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Once we figured out how to live below our means, we started saving and investing.  That’s a story for another day, but if you’re interested in how to do low cost investing, read books by Jack Bogle and Warren Buffett.  They’ve been pretty successful investors, and they’ve helped us become pretty successful, too.

Hal