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Change the way you spend to live within your means

Have you ever ask the question why someone earning as much as you or less than yourself is able to afford some things you cannot afford??

Chances are they either

  1. have a rich relative funding their lifestyle
  2. have an alternate stream of income
  3. living beyond their means by funding with debt/borrowings

When it comes to number there is no simple solutions other than to change your job to an employer that pays you more or you take a good look at how you live your life and stem the problem at the root cause.

Here’s a good take from Roger NusBuam:

We should all know how credit card interest works, know enough to only take out a mortgage we understand, know that we have to save money, have some idea what to do with those savings and that our bills should not add up to more than our income. Beyond that some understanding of macro economics to understand some of the basics of what has happened in the last couple of years would be nice and maybe people do have the requisite understanding, I don’t know.

I do think that a lot more needs to be done to teach people more about everything. On the investing front the basics need to include, among other things, how markets work, how investment products work and how numbers work. One more that I would add will not be a new concept but the wording might be a little different.

One problem that I see, or at least I think I see, pertains to how people spend their money. Specifically I think that too many people fail to respect whatever it was that they did to accumulate what they have. A common behavior is a willingness to spend in such a way with a belief that it can be made up later (somehow). This sort of thing has been ascribed to the baby boomers and the manner in which they came of age and maybe this is why but either way the lack of regard for the fragility of the nest egg strikes me as a colossal problem looming out there that may be unquantifiable.

Someone like Fidelity or Schwab could probably do a study to figure out what the average nest egg is today and how much the average was three years ago but it seems like it would be difficult to assess how much of the average shrinkage is from the market going down and how much from stupid spending decisions.

How many people do you suppose (this is going to offend some people) spent $200,000 or more on an RV because they were convinced they would love it only to find out they don’t? Instead of dipping a toe in the water by renting one for a couple of months (I got quoted a two month summer rental rate from Cruise America of $5600 and I think they would charge for miles on top of that) people like to go out, buy first and ask questions later. Maybe I am wrong but I don’t think $200,000 gets you the Cadillac of RVs either. Additionally you could get a lot of two month rentals, that you don’t have to maintain, in before you begin to challenge economics of buying an RV. Some folks make the correct decision buying an RV but I doubt that is the case the majority of the time, I’d say not even close.

From my experience this type of example can be applied to countless things people spend money on and I’ve learned there is no having this conversation with someone. Or at least I have not figured out how to have this type of conversation be productive. Hopefully you have the introspection that I think is needed for an objective analysis before making a huge financial commitment at a point in life that you want to stop working.

[Random Roger >>]


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