DailyNews Online Edition

Do you live within your means?

PROBABLY some of my avid readers may not like to answer this question at all as they may think that I am interfering with their privacy.

Let me expressly, as well as candidly, clarify that I have no such intension to do so. Instead the purpose is to highlight some hard facts relating to our day-to-day lifestyle which in one or the other way can have a great bearing on one’s financial independence or financial dependence – whatever the case may be. 

In today’s liberal world, every person has the right to live the way he/she desires and nobody should have any objection to that. But there are some minimum laid down rules, or call it principles, which each one of us is expected to adhere to. Failing to do so would have a devastating effect not only on our life, but even can adversely impact the life of our loved ones.  As the matter stands clarified let us concentrate on our core subject of ‘living or not living within one’s means’.

Before I give my verdict whether one should live within one’s means or not let me share with you a practical story. I happen to know a gentleman named Joseph who lives in my locality in India since more than 15 years. I have been observing his lifestyle for a long time very closely.  

In the year 1988 Joseph joined a local bank as an entry level officer and got married in the same year. In 1990s when most of us were riding two wheelers, Joseph bought his first car by taking a loan from the bank. Probably this is the best gift one can offer to one’s newly wed spouse. The house where Joseph stayed was on rent. So in a way Joseph was required to pay at least two EMIs every month i.e. house rent and instalment for the car loan.  

Joseph believes in maintaining a particular status in the society and as a result most of Joseph’s neighbours were jealous of his life-style, which is a normal human psychology issue. In 1995 the couple [i.e. Joseph & his wife] were blessed with twins – a daughter and a son. This on one side was a great joy for the family while on the other side needed some adjustment in life-style so as to maintain a balanced budget.  

This was not to be the case as Joseph was in no way ready to make any adjustments to his lifestyle. Since he had no backup savings to spend, there was only one way to maintain the current standard, and that by borrowing additional money. This is what exactly Joseph did as he borrowed from various sources. But money always comes at a cost.

So slowly and steadily Joseph entered a stage where he had to borrow every month for multiple reasons i.e. to pay rent, to service other debts, and to feed his family. This in other words is called a ‘debt trap’.   How long can somebody pull-on in a situation of ‘debt-trap’? For sure, not very long!

And finally the doomsday arrived. Since Joseph was unable to service his loan, one fine morning the bank sent its recovery agent to confiscate his car. This was not the end but the beginnings as Joseph’s landlord threw his belongings out due to unpaid rent for the last six months. When other lenders came to know, they started picking up Joseph’s household goods to recover the money they had respectively lent.

Finally we had to call police to control the situation.  Who is to be blamed for the misery of Joseph’s family - the Bank, the landlord, other lenders or Joseph himself? I think the answer is crystal clear. This is a hard but necessary truth that for a long time Joseph lived beyond his means and thus landed his family into the current mess. Are there any lessons one can learn out of Joseph’s harsh experience of life?   

One of the best ways to start living truly within your means is to pretend that your means are smaller than they are. A simple way to do this is to act as though you are still earning what you were earning before your last raise or the extra money you got as a bonus. Immediately put all extra money into a savings account (or use it to pay down your existing debt). For example, if you were earning $2000 per month before your last raise and now earn $2500 per month, you should put that $500 per month into savings and pretend that you don’t even have access to it.

This will allow you to create an “emergency fund” while learning to live within your real means. The reason it works best to select a number that corresponds with an amount that you earned previously is because you already have experience living with that income. You know that you can make it work if you have to.

“Pretend that you have to.”  Stick to cash whenever possible for future purchases. If you don't want to carry cash, use a debit card instead of a credit card. Even when you use a credit card, ensure that you pay it off every month and pay it off on time!  You can even look into voluntarily simplifying and downsizing your lifestyle. Seek support and advice from peers and family members who are more equipped at frugal living if it helps you.   

It is really, really tough for people to live within their means when they have easy access to loans through their credit card companies. It is so simple to just swipe that card and forget that you don’t have the money to pay for it when the bill comes due. Paying cash for everything eliminates this problem. Sure, there are some great benefits to using credit cards. However, until you truly learn to control your spending and live within your means, you’re just asking for trouble.

“Just pay cash”.  In the end let me come back where I started in the beginning by asking – “Do you live within your means”? You don’t have to answer this question to me or anybody else but to yourself. Introspect and determine which side of the fence you currently are. Do you want to be the next Greece or Spain? Finally let me conclude by sharing a famous quote - "This would be a much better world if more married couples were as deeply in love as they are in debt."

Cheers!