In our opinion, if you aren’t saving 10% of your income for retirement and at least another 10% of your income for savings/emergency fund/college/investing/etc., then your financial life is out of balance and you are definitely living beyond your means.
Most people start with their take-home pay, deduct out all their various monthly expenses and frivolous spending and then whatever scraps are left over goes to savings. This is entirely backwards and almost ensures that you’re going to spend too much on your house, car, and just about everything else since you have a false sense of just how much money you have to spend each month.
A New Perspective to Consider
Living beyond your means doesn’t mean you have to be as extreme as the stereotypical family next-door who drive a BMW and live in a McMansion (even though they have no savings); but rest assured something is wrong if you aren’t able to save money and you need to take a hard look at your financial life to see how to get back on track.
Keep in mind, “affording” your lifestyle doesn’t mean just scraping by month-to-month, living on the edge. If you’re in that situation, you’re in an emergency situation and you need to take action. You cannot live paycheck-to-paycheck and think you’re going to have a happy, relatively stress-free existence.
Consider Your House Payment
Are you ‘house poor,’ living in a house that you just can’t afford? If you can make the mortgage payments but you have nothing left over to live a normal, enjoyable life, then you are in way over your head and you cannot “afford” your home. If this is your life, maybe it’s time to downsize or (possibly even better) rent a home.
Have Car Loans?
Do you have significant car loans? New cars are for suckers; buy an older model used car and lose the horrendous monthly payments on something that depreciates in value each and every day.
What about Your Food Budget?
Are you going out to eat multiple times a week? Buying other frivolous garbage you don’t need or really even want? Just stop! Buying this worthless stuff certainly isn’t making you happy and it’s just adding to your financial stress. Try to figure out what is leading you to waste all this money; many of these problems are due to bad habits or insufficient information, both of which can be remedied.
Take our word for it; your life is a lot less stressful with some money in the bank and a lot less “stuff” cluttering up your life.
Like we state in nearly every article on this site, you need to make things easier on yourself — life is hard enough without having to worry about money each and every day. Try to put your savings on autopilot as much as possible and don’t allow your brain to trick itself into thinking you’ll save otherwise. You simply won’t. You need make it automatic, or 10 years from now you’ll still be struggling and you’ll wonder where all the time and money went.
Here’s How to Get on Track
Two easy steps will take care of everything:
- Sign up for your 401k at work and ask them to deduct 10% of your salary. If you’re fortunate, your company will have a “401k match”, which means your 10% savings will turn into something like 14%-18% with a free 4%-8% of your salary kicked in by your employer.
- Set up an automatic transfer that automatically deducts money from your checking account to your long-term savings account and/or investment account(s) in an amount equal to 10% of your salary. It’s best to set these transfers up for the day after your paycheck is deposited, so you don’t even consider this money to spend. It’s just gone and off to savings, and you will not even miss it.
We recommend reading the article at Mr. Money Mustache’s site entitled The Shockingly Simple Math Behind Early Retirement to get a sense of just how powerful it can be to save more and more money. Even if you’re starting from $0, it is really easy over a 15-20 year period to save up hundreds of thousands of dollars (if not more).
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