Living Within Your Means

By Myra O’Dell

The first step towards retirement is…

Living within your means. This is the first and most critical step towards having a secure financial future. Without it no amount of savvy financial tips can help you reach your financial goals. It’s universal to all people: young and old, rich and poor. It doesn’t take a fancy degree to understand the concept. Just some simple addition and subtraction. What goes out must be less than what comes in. And while the concept is so easy to understand, putting it into practice is another story entirely.

However, living below your means is well worth the sacrifice and the degree to which you live below your means is mostly in your control. In Andy Stanley’s podcast, Breathing Room, Episode 3- Money, he explains some of the benefits of living within your means. You sleep better, get along with people better, concentrate better; you’re more generous and life is better. He emphasizes that standard of living and quality of life are not equal. You can increase your standard of living just by borrowing more money but your quality of life increases by creating breathing room. Don’t spend your way into slavery. Don’t allow your income to dictate your spending. Instead, have some breathing room between the two.

breathing room

In addition to the reasons Andy gives for living within your means, if you would like to retire earlier rather than later, the relationship between how much you bring in versus how much you live on is essential. In fact, Mr. Money Mustache, a financial blogger who writes about early retirement, offers the following graph on his website.

savings rate

This chart illustrates how many years you would have to work given different savings rates based on your income. The calculations in this chart assume that you earn 5% per year return on your savings after inflation and that you live off of 4% of your savings during retirement. Increasing your savings rate not only boosts your pot of investments available for future retirement, but it also teaches you to live a lifestyle below your means therefore reducing the amount of spending during retirement.

I encourage you to check out the links to Andy’s podcast and Mr. Money Mustache’s article. Even if you are already living within your means, they both serve as a good reminder and encouragement as to why you should continue this habit. If you would like help with your investments, come see us at BCS Wealth Management.

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