Years ago I was discussing finance basics with a client: budgeting, debt, investments, etc. As we talked about the benefits of eliminating debt in order to make life easier and more comfortable she said to me,
“All you have to do is live within your wage.”
That one phrase more perfectly defines my financial philosophy than any other that I have heard. So, what does it mean in practice?
If you think about it, living within your wage is actually quite simple. It can start when you are in your early 20s. If you are like most people, you are not making very much since you are at the start of your career and you probably have some college debt to pay off which further cuts into your meager earnings. So, what can you do?
- Calculate your average take-home pay (it could be weekly, monthly, or even annually, whatever makes more sense to you).
- Subtract any outstanding debts or other payments that you need to make (loans, etc.).
- Plan to put at least a little into savings (emergency fund, retirement account, etc.). Set a goal to save 10% of your income.
- Whatever you have left becomes your budget.
It is easy to say but, hard to do. Access to credit is everywhere and keeping up with the Joneses is so common (and compounded with pressure from social media). You can easily be tempted to live above your wage. The problem is, you steal from your future self when you do it. The interest payments alone can force you to play catch-up for years.
Many assume that living above your wage is mostly a problem for young adults who are not earning very much. More than 30 years’ experience as a financial advisor has taught me that those who start living above their wage do not often stop the practice as their salaries increase. With each pay raise, they increase their spending with a bigger house, nicer car, dream vacations, etc.
It pains me when people come into my office in their late 40s or early 50s with hopes to retire in the next 10-20 years. We discuss their household income and the value of their assets. These prospective clients often have above average income but, their above average spending has caused them to rack up debt and left them with insufficient funds to retire in the manner that they desire. My advice to them is always the same: increase your savings and pay off your debt. When you have done both of those things, come back and we will talk.
Whatever stage you are at: young adult starting out, middle-aged in the prime of your working years, or already retired; it is never too late to start living within your wage. All you need to do is go back to the basics:
- Calculate your average take-home pay (whether it is earned income, Social Security, or investment income).
- Add up your debts and calculate the minimum payment (what you must pay to avoid defaulting).
- List all of your mandatory monthly expenses (and no, a streaming subscription is not mandatory even if the next season of your favorite show is about to premiere).
- Establish a savings goal (regular contributions to your emergency fund, retirement account, etc.).
- Choose a method to pay off your debt and allocate a portion of your budget to do so (snowball, avalanche, etc.).
- Calculate what is leftover. That is the amount you have left to set a spending budget.
If you have been living above your wage, your new budget will probably have you cutting a lot of things that you used to spend on. It might be canceling subscriptions, cutting back on eating out, even moving to a less expensive home or apartment to decrease living expenses.
Living within your wage does not have to mean missing out. Even if you have been overspending, making a plan to thoughtfully spend what you can afford on things that really matter to you can leave you still feeling fulfilled with your life while bringing you the peace of mind that comes with eliminating debt and saving for the future.
Whether it’s big or small, growing or declining, living within your wage allows you to live your best life. Ultimately, isn’t that what we are all trying to do?
If you would like help determining how to live your best life by living within your wage, give us a call and we would be happy to take a look at your personal situation.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.