Means is income and the area in which you live, not your background, career or peer group
The common assumption is that the more money you make the easier your life will be and the less you’ll have to worry about finances. This couldn’t be further from the truth. It’s not about how MUCH money you possess or earn, living within your means is how you utilize money; save it, spend it, view it and what goals you have surrounding it. Whether you make $1,200 a month or $10,000 a month, you need to be realistic with the cost of living in your area and your priorities.
We have friends that from every outside perspective should be living well. Debt shouldn’t be increasing, houses should be close to paid off and there should be a significant emergency fund because they make three to four times what Jon and I do and we’re able to do quite a few of these things. However, not everyone understands that their paycheck isn’t an entitlement to a certain lifestyle. A lawyer doesn’t automatically get to eat out at $70 a plate restaurants, a doctor can’t always afford a large million dollar home and even if all your colleagues seem to be able to afford month long European vacations, it doesn’t mean you’re able to.
Americans hear about living within their means all the time – but clearly it doesn’t sink in. At the end of last year more than two thirds of US citizens were living paycheck to paycheck with no buffer.
Cost of Living
This calculator shows you the cost of living in your area (limited to major city groups, but there should be one close enough to get an idea). Once you understand the cost of living and evaluate your income, you’ll see how flexible you can be surrounding your priorities. These factors have no relation to your “Keeping up with the Jones’ counterparts.
Jon and I always joke about moving to the Midwest or Texas – even with our limited income we would be well on our way to home ownership. That calculator from bankrate.com shows you what your equivalent salary would be in the place you’ll be (if you’re moving) or what it would be if you moved to various places throughout the U.S. You may not have need of this, but I think it’s fun.
What you can afford
There are a few basic guidelines to determine what you can afford. Here is our list of determining factors:
- You can afford rent or mortgage that doesn’t exceed 30% of your gross salary.
- If you have debt – you should be able to put 10% or more of your income toward that debt.
- If you have any credit card or personal loan debt, you should not take on any more debt. (Home ownership, loans or otherwise).
- You should be able to invest money every month with consistency, whether $50 or $500 (regardless of whether you have debt).
- You should be able to save at least 10% of your monthly income when you have finished paying off debt and a small amount each month if you are paying off debt.
- Unless it’s a college education or a house, you should be able to pay in full.
These are pretty doable goals, but it’s shocking how many people REGARDLESS of their income don’t follow the majority of them. Individuals paying 70% of their income on their mortgage and scraping by to pay the rest of their bills. Folks who live well by house/food/leisure standards but have less than a months worth of expenses stored in the bank. People who have thousands of dollars in credit card debt but see no problem buying another house as an investment. Folks with most of their financial house in order who can’t seem to commit to saving for retirement.
What’s a necessity and what’s a luxury
Another common problem with our ability to save money and live within our means is our belief about what constitutes necessity. It’s amazing that many people find it a luxury to invest in a retirement account or save a few hundred dollars a month but feel like having access to their favorite television shows in essential. We’ve used this statistic before and we’ll use it again because of how ridiculous it is: 46% of Americans have less than $10,000 saved for retirement.
What separates middle class from those living in poverty
When I help out as a mentor there’s one consistent concept that the overseeing Love INC staff addresses in our mentor training. As a middle class person we generally value things like saving, retirement and thinking of the future. When someone is a product of cyclical poverty the way they live their life is focused on the present. This is because they are and always have been in survival mode.
It was difficult for me to defend my advice to those I worked with to save $10-$15 dollars a month. I just wanted them to have a small buffer between living from day to day and a tragedy plummeting them into insurmountable debt. What I’ve learned is that this concept is more than just differing views, it’s a cultural divide. We may both be Americans from Newberg, Oregon, but I live in the culture of middle class and this person lives in the culture of poverty. Our values are vastly different and while I perceive my approach and advice regarding finances would be helpful, they have not been brought up with concern for their future. It’s foreign to them.
(There are many things to learn from those who do live in the culture of poverty but few of them relate to finances).
I mention this only to invite those of us who consider ourselves middle class to think about where poverty begins. Cyclical poverty is often a product of not thinking enough about the future. Cyclical poverty can start with the fight to live from paycheck to paycheck. Cyclical poverty is by definition passed from generation to generation.
Someone living off $800 a month can make it. They can make themselves into a person with 3 months savings. They can improve their future. The challenge is understanding what their means are, what necessities are and learning how to value their future as much as they value their present.
How are you taking strides to better your future? What statistic about individual savings and retirement frustrates you the most? How can we help one another to make these statistics better (short of taking control of everyone else’s lives…)