How you use your money and the effects of those decisions can impact your lifestyle in the years to come.
Often you will hear the term “Living within your means”, which relates to whether your lifestyle matches what you earn without sacrifice. This method of managing your money ensures that you maintain minimal debt, a healthy credit score and can live comfortably.
Living within your means is about only spending what you earn – and no more.
Living beyond your means is about living a lifestyle that costs more than you earn.
Think about it – if you spent more than you earn, where would you get that extra money?
Answer – you would borrow it, in the form of personal loans, credit cards or loans from friends and family. The problem with borrowing to live is that eventually, you will need to pay that money back.
Put it this way – if you had $5 could you afford to eat in a restaurant where the main meals cost $30?
The answer – No
If you had $50 – could you afford to buy a car worth $10,000?
The answer – No.
This is where people live beyond their means – they buy things and do things that cost more than what they can afford, not just now but in the long-term. They use things like credit cards, hire-purchase and store-cards to buy things that they want right now and then use personal loans to consolidate all that debt in order to pay it all back. The cycle of debt can be continuous unless the way of their thinking is changed.
If you’ve been spending more than you earn, and then suddenly you need to start paying back the money that you’ve borrowed – what’s going to happen? You are going to have to adjust your lifestyle and utilise part of your income in order to repay the money that you owe.
Benjamin Franklin said that the road to wealth is either reducing your wants to fit your income or increasing your income to fit your wants – either way will work.
Change your mindset
The decision-making process about spending money is simple. You either spend it or you don’t.
Not everyone finds it that easy though. They often feel compelled to spend and often the reasoning behind that compulsion is opportunity; sales, end of line products where time is of the essence, financial windfalls and more recently - online laybuy schemes where you can make regular payments for those products but unlike traditional laybuys, you will receive the product before full payment has been made.
Does that expenditure get you closer to your goal?
If your goals include purchasing a home, travelling the globe or retiring with enough money to not only survive but to enjoy your new-found freedom, the management of your money now, plays an important part in achieving that goal.
Let’s use buying a house as an example.
This will most likely be the most expensive thing you could purchase in your lifetime and money management in the lead up to this purchase is crucial.
When living on the edge of your means, you may find it difficult to save enough money to form a deposit. If you can’t increase your income, you need to look at decreasing your expenditure.
The weekly budget generally consists of four main costs – Rent/mortgage, food, utilities such as phone and power and lastly short-term debt. Additionally, you may also have ongoing costs such as regular hair and beauty appointments, regular coffee catchups with friends, drinks after the rugby etc.
Do these added costs help you achieve your goals?
Is there a way that you could still have these luxuries in your life but decrease the cost involved?
An alternative to spending $10.00 a week on a coffee and muffin when catching up with friends is to perhaps arrange a “homemade coffee and muffin” date at alternating houses. You save $10.00 per fortnight; you still get coffee and a muffin, and time with your friends. Include more friends in this plan to save even more money as you wouldn’t need to contribute as often. Plus, you save on parking!
Next time you decide to spend money on an unbudgeted item, consider if it is going to help you get closer to your goal or hinder it. Do you really need that new pair of shoes? How important is this goal to you?
In order to widen the gap between your income and expenditure, you need to channel any excess funds to where it is needed most. Clear the short-term debt first then add it to your savings account.
If you continue to think about money as a tool to purchase immediate happiness, your goals will forever remain out of reach. Immediate gratification is short-lived and when you form the habit of spending to maintain a feel-good lifestyle, it can be hard to break the cycle.
Sacrifices shouldn’t be painful. They can be done slowly, one at a time or you could completely cut the cord and go cold turkey. You need to weigh up how and when you want to have that goal achieved and if you are willing to do what it takes to achieve it.
This is not to say that you shouldn’t have fun with your money, after all you did work hard to earn it, but the reasons why and how often you are spending it need to be clear.
Is it to make you feel a certain way now or will it help you reach your goal in the future?
Reward yourself occasionally. Each time you pay off a short-term debt or add $500 to your savings account, treat yourself to a fancy coffee or nice dinner out to keep you motivated.
Here at First Mortgages NZ, we understand the balancing act of enjoying life while trying to improve it, so if you need some guidance on the best approach to take, come in and have a chat with Tim Oliver. You can contact him either by calling or sending a text through to 02102956499.
Tim Oliver is an Authorised Financial Adviser and director of First Mortgages NZ Ltd and Oliver Financial Planning Ltd. The information provided in this article is not intended to constitute advice to any person.