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Living Beyond Your Means


I read a recent article published by MoneySense magazine talking about the hardships faced by a couple who made over $375 000 combined income living in Oakville, Ontario. If you read this article, you would probably have no sympathy for these rich people. $375 000 a year would certainly qualify this couple to be in the upper echelon of earners in Canada. What is astounding is that the couple managed to accrue a yearly spend of over $172 000 a year. That’s the equivalent of $3 300 a week, or $472 a day.

Now you would probably wonder why that would matter, they make so much money so they can afford to be lavish, but here’s the problem, they’re feeling pinched. They don’t feel rich, in fact they’re starting to feel poor.  One of them just lost their $300k a year job. That’s 80% of their income.

Falling Down Hurts More

babycryingLet’s take a look at the example above for a family making close to $400k a year. They have actually been spending quite a lot of their earnings and living it up. There’s nothing wrong with that. The couple has worked hard to get to where they are, but now that they are losing 80% of their income and things are going to change for the worse.

Generally once expectations are set, it’s hard to imagine living without the things that you are used to: Maid service, after school classes, big houses, exclusive country clubs. All these luxuries just poof and gone away. This can be emotionally damaging to a lot of people. It’s difficult to accept failure after living with such high standards.

This is why it’s so much harder to come down from a high than it is to slowly build up. Had this couple managed to put more of their money away and invested it to grow it into millions of dollars, they would be able to maintain their lifestyle by spending just the interest from their investments. Hindsight is 20/20, but let this be a lesson that sometimes the sacrifices that are made early in life can become a blessing in disguise when the unthinkable happens.

Cash Flow Problems

That feeling of being rich simply isn’t about how much stuff you can buy. For someone that has an endless supply of money, you could continue to spend indefinitely, but that’s probably not a realistic scenario for even the richest person in the world. On the opposite side of the spectrum are those that just “get by” on a monthly basis. Having to worry about paying bills just to achieve the necessities of life is certainly a stressful situation that we all want to avoid.

Regardless of what scenario you fall into, the single most important thing to recognize is that the feeling of being “well off” comes down to how well you handle your cash flow. Monthly cash flow is quite simple to compute.

Monthly Cash Flow = Net Monthly Income – Net Monthly Expenses

Add up all your monthly income sources (includes interest, dividends, government payments) and then subtract all of your monthly expenses to see what you net cash flow is for the month. If your monthly cash flow becomes negative then we have a problem. That feeling of being “broke” generally occurs when our net monthly cash flow gets near 0 or falls into the negative.

Getting Into The Black

chopping-block12There aren’t many techniques to get into a positive cash flow position. There are only two variables in the equation. Either increase your monthly income, or decrease your monthly expenses. Increasing your monthly income might be hard. We only have so many hours in the day to earn money. On top of that, changing jobs or demanding a bigger salary is easier said than done in the competitive environment that we live in.

That leaves only the other side of the equation, which is to control our expenses. A lot of what we spend our money on can be controlled by us individually. Only we can tell ourselves what is necessary and what is not. For most individuals, this is the hardest part. It’s hard telling ourselves that some of the things that we cherish dearly or have grown to accept as normal are actually luxuries.

There are many hard choices to be made, but becoming cash flow positive is the first step to repairing your finances and getting yourself to closer to financial independence. Just remember that the small sacrifices that you make now will ultimately lead to a better outcome in the future. Baby steps.

Spending The Interest

The ultimate goal to achieve financial independence is when the things you want and need can be bought through your investments alone. This means that the choice to work truly becomes yours. Many people make the pretense that it’s necessary to save enough money to last till the end of their time. This isn’t true.

The goal is to save enough money such that the income that your investments is enough to sustain your standard of living. What this really means is that you can’t just have money sitting in a bank account earning minimal interest or socked away under your mattress. It has to do something for you.

If your investments provide your with a paltry long-term return or you actually have to pay more into your investments to get something out of it, then you are definitely doing it wrong. Your investments have to be self-sustaining. In other words, your investments shouldn’t be a monthly expense. They need to provide some kind of income stream over the long term.

Keep It Simple

Bolsa_Chica_State_Beach_sunsetIt’s really simple. Really. If your monthly cash flow is negative, then it’s time to review your spending habits and make sure that you are actually living within your means. Once your are cash flow positive, then the goal shifts to turning that excess income into a larger income source. I’ve written about how powerful compound interest can be and this is how one starts to achieve financial independence.

Money isn’t the only thing that leads to happiness. Sure it can help in many ways, but there are many things that can bring joy in life, like meeting up and chatting with friends, hiking through the park or enjoying a sunset walk along the lake. Find the simple things in life that make you happy and you’ll forget about all the money matters that stress you out and keep you up at night.

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