 A Mercedes E Class owned by a family member of mine in California, a place where they say "you are what you drive." This is a beautiful car, but only if it's within your means. It wasn't within their means, unfortunately, and it almost brought down their financial house. To be successful and to live a life of dignity and self-respect, every independent adult who is of sound mind must live below his or her means. Living above your means is just unsustainable. Living at your means might work, but it isn't enough. You Cannot Reliably and Reasonably Build Wealth If You Are Not Able to Live Below Your Means Assuming you are not set to inherit a large sum of money and that you won’t have a large and unexpected windfall such as winning the lottery, to truly have a stable financial life and to build wealth, you must live below your means. In fact, even if you do inherit a lot of money or win the lottery or have some other financial windfall, you must still live below your means if you are to maintain and grow your newfound wealth. The principle of living below your means is a fundamental principle of personal finance and wealth building - it lies at the bedrock of your financial future and without the ability to live below your income (be it earned income, investment income, royalties, dividends, or any other sort of income), you will never become rich. There is a quote that is relevant here from the book The Richest Man in Babylon - “a part of all you earn is yours to keep.” That quote is deeply fundamental to building wealth and every person who has accumulated riches throughout history has understood the principle the quote is elegantly trying to convey. What that quote means is that when you earn some money, you shouldn’t give it away to everyone else - don’t give it all away to your supermarket, to Apple, to Samsung, to Microsoft, to AT&T, to Verizon, to Comcast, to T-Mobile, to Netflix, to your favorite stores at the mall, to Amazon, to your favorite restaurants, to Starbucks, to your mortgage company, to your car company, to American Express, to Visa, to MasterCard, to Discover, and to all of the other people and businesses who work tirelessly to get some of your hard-earned money (and even if your money wasn’t hard-earned, you still shouldn’t give it all away). If you give all of your money away, you will have none for yourself. And if you have none for yourself, how can you become wealthy over time? This concept from The Richest Man in Babylon is deeper than you think. I understood it right away when I first read the book at the age of 18, but when I told people in my family and some of my friends about this concept that I found so intriguing, they were puzzled. I got two types of reactions: They either thought it was too simple of a concept to be intrigued by. “Of course, you should save,” they would say to me. I realized these people didn’t fully understand how profound this concept was, even though they were probably on the right track. Others, however, were far more deluded. They thought that it was a ridiculous notion because whether they had money left over for themselves wasn’t in their immediate control. They said they had to make credit card payment, mortgage payments, car payments, insurance payments, purchase food, purchase water, purchase clothes, and do all of the other things needed to live a decent life. They argued that it was naive to think that they could magically have money for themselves - naive that they could magically save money every month. I understand both perspectives, but I know they are both confused and deluded. I also believe that purely explaining it won’t work - one has to actually take the effort and put some money aside one month and see what happens. It will provide you with dignity A wise man once said that “there is no greater dignity than living below your means.” This is very true. Humans need dignity and self-respect. As adults we have a deep desire to find our own way, to pay our own way, and to earn our own way. We don’t want to depend on the assistance of others or the assistance of the government (which is the same as the assistance of others). Of course, I don’t suggest that assistance to those who are in difficult times should not be given. Nor do I suggest that those who are in difficult financial times should feel even a little bit unpleasant or ashamed by receiving help - we are all brothers and sisters on the Earth. However, I do have a basic understanding of human nature and I know that no matter what, an adult wants to be self-sufficient and make their own way. I believe a part of the reason we want to make our own incomes and make our own way has to do with our ancestral past. Living in small communities in antiquity, everyone had to contribute or else the entire community would suffer. We have a desire to please others, to create value for the world, and do something good for our fellow brothers and sisters. This value creation is rewarded financially (although only usually and imperfectly). Additionally, the knowledge that you are able to live below your means will give you dignity and self-respect because you will know you are a disciplined person who is able to steer the course of his or her own ship instead of being blown from place to place by the wind. By living below your means, you will have the knowledge that you can make it, that tomorrow will be ok, and that you don’t need to depend on others to survive or thrive (again, not that there is something wrong with depending on others for brief or long periods of time). By living below your means, you will have the comfort knowing that there is robustness in your life - that you are a resilient person who can thrive even in the face of difficult times and uncertainty. A person who consistently overspends is a person who lacks disciple and who cannot be confident in his or her ability to whether life storms well - that person will wonder about what will happen should things get worse. Instead, we must strive to live life well, but in a manner that reflects our understanding of financial principles, our disciple, our courage, and our resilience. Takeaways
"A part of all you earn is yours to keep." |
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