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The Meaning of Means

I tried to squeeze the word "means" into the title above a number of times to begin making a point, but never figured out how to do it; so, we'll go with what we've got.

No doubt you've all read or heard the phrase, "living within one's means," and you know that in this phrase the word "means" means money. (HA! I got the word in a couple of more times!) It's the very wise and common-sense notion of living within your current income-spending no more money than you make.

If at the end of a time frame, (a pay period, a month, a year), you find you've spent more money than you've earned, you're living "above" or "beyond" your means; and that's not a very good idea. If at the end of the time frame you find the amount you've spent is equal to, or slightly less than, the amount you earned, you are living within your means, even if just barely within. Living above your means is NOT a good idea. Living just barely within your means is a better idea, but is it a good-enough idea? In a minute, I'll argue that it isn't.

Question: How do people come to live beyond their means?
Answer: By acquiring DEBT.

Debt is spending. It may not seem that way at the time since in your mind, (sneaky thing, the human mind), it seems like you are spending someone else's money when you make a loan or use a credit card. After all, you aren't laying out green backs on the store counter or writing a check. But, believe me, it IS your money being spent.

When you acquire a debt, you make a legal commitment to pay the borrowed money back to the lender by some future time-with interest, I might add. In effect, you are spending money you don't have yet. It may seem to you that you are living within your means because you can still make all your monthly payments, but, depending on the total level of your debts, you might well be edging toward living above your means.

In America it is quite an easy thing to acquire debt. If you have a job and a steady paycheck, there are a whole host of businesses eager to extend credit to you by way of loans of various kinds including easy-to-qualify-for credit cards. Further, during any drive about town, stroll through a shopping mall, or thumbing of catalogs mailed to you, it's very easy to find a lot of things you would like to have. This combination of many delightfully enticing consumer products and easy credit is often hard to resist because-even if unwisely-we can instantly gratify our wishes and wants. All it takes is a credit card that isn't maxed-out yet.

If we don't understand that debt is spending, if we aren't planful in spending, and if we are really active in gratifying our wishes instantly by using credit, we'll find ourselves in a position of having nearly all current income and much future income committed to repaying money already spent leaving little or no money for emergencies or other future needs. No money to save. No money to invest for the future.

So-living beyond one's means is a bad idea, and living just barely within one's means is a better idea, but only marginally so. What is one to do?

You guessed it, live BELOW one's means.

Andrew Tobias, in his book, "The Only Investment Guide You'll Ever Need" (Harcourt, Inc.), writes about the idea of living below one's means, and a fine idea it is. The best idea. To live below your means you simply spend less than you earn. If you spend less than you earn, lo-and-behold, you will find you have discretionary money at the end of a time frame. Money that IS NOT already committed which you can use in any way you choose.

• Money you can use to pay down remaining debt to free more discretionary money to use as you choose.
• Money to save for unexpected future financial emergencies.
• Money to save for buying those consumer items you really need outright without having to pay interest on each of them.
• Money to invest so as to grow your assets for future needs.
• Money to invest for your eventual retirement.

I will say this, living below your means isn't always easy, especially at the beginning, but it does get easier once you get the hang of it. Doing so requires at least two skill we can all learn; organized planning, and self discipline. It will mean learning to delay gratification of your buying impulses. Living below your means will probably require you to develop plans for allocation of your income that include immediate and long term priorities. You'll need to practice recognizing the difference between what you want and what you really need, and practice developing and living within a budget. It might well be hard to do at the beginning, but the pay off for you will be tremendous in the future.

I'll make three recommendations to you at this point:

1. Figure out where you stand now financially by doing a "net worth" calculation. (See "What Do You Think You're Worth" in the ITS: FYI page bibliography.)
2. "Invest" a few of your current discretionary dollars in the Andrew Tobias book referenced above. The book is a treasure-trove of information and ideas for managing your money and, assuming you read and use it, it will indeed be an investment that will return it's cost to you many times over.
3. Develop a plan to contain your spending so as to "live below your means" toward the goal of preparing for your future.

arley