Tuesday, July 21, 2009

Living within your means

There is a lot of buzz today about global warming, sustainable agriculture, the green revolution and other world issues. When it comes right down to it, living within your means includes all of these issues and a lot more. Unfortunately, living within your means has gained an association with poverty. But you do not have to be poor to live within your means. Simply put, living within your means involves spending less than you make. It does not mean that you have to live on a farm or grow your own food, it just means having a budget and having some control over your spending habits.

Most of the ways I read about to save money are really marginal. If you really want to save money, you need to know how much you are presently spending. That means you track every penny of your expenditures. You need to know exactly, not approximately, and not a ball park figure. Once you know your present rate of spending and obligations, you have to continue to track spending for many months and years. There are some expenses that are annual, like real estate taxes, and others that may only come up after years, like the cost of replacing the roof on your house. But all of these costs need to be considered.

Once you know what it costs to live, you can start making adjustments to your spending based on realistic evaluations of your actual needs. Do you really need the air conditioning set to 72 degrees in the summer? Do you really need to buy a case of water every week? Could you save money by buying a different car? Do you really need to eat out two or three times a week? Once you answer these questions you are ready to live within your means.

Let's get some definitions down, if you owe debts and are paying interest, by definition you are not living within your means. If you were living within your means you would have no interest payments. There is an argument that if you have a piece of property that generates income, you can carry the interest as a cost of doing business, but most consumer debt is not offset by specific income.

Living within your means is not an issue as to how you spend your money. It is an issue about whether or not to spend money at all. Fundamentally, it addresses the problem of owning things or being owned by them. Let me give an example. One of the most common big ticket item purchases in Arizona is some kind of outdoor motor vehicle; a boat, an ATV, a jet ski, a motor home or something similar. I have no problem with spending money on any of these items. What I think is the problem, is purchasing a _________ [fill in the blank] when you have a burden of consumer debt. How many of the people in my neighborhood who have lost their homes to foreclosure have one or more of these outdoor vehicles? By observation, I would say quite a few.

I have no argument with someone who chooses to purchase any one or more of the items listed above, what I do have an argument with is purchasing a consumer toy at the expense of borrowing money to purchase a house or to pay for necessities. This example applies at all income levels. It is just as difficult for a person making a lot of money to live within their means as it is for a person living below the poverty level.

Unless and until we achieve a balance between what we need and can afford and what we purchase, we will never live within our means.

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