Spend Less Than You Earn
Estimated Lesson Time: 4 minutes
There is a common misconception that wealthy people have fewer money problems than the average person. Likewise, people with money problems tend to believe that more money will solve their money problems. This is rarely the case. The large majority of money problems in developed countries are not due to the lack of money, they are due to overspending, and overspending leads to debt. A 1992 Federal Reserve study showed that 43% of U.S. families spent more than they earned. Money problems, specifically, spending more than one earns, is one of the leading obstacles to finding happiness.
It is the typical trap that most people know all too well: It begins with parents trying to be helpful with the advice, “Buy the most expensive house you can afford!” The theory behind this advice is that when you use a mortgage to buy a home, you are using other people’s money to grow your asset. The problem is, you are tying up all your funds in a long-term investment. To the entrepreneur or investor, there is opportunity cost, or the cost of missed opportunity, associated with this money. In addition, generally speaking, the more expensive the house is to buy the more expensive it is to maintain. These maintenance costs, including time, are a liability and not an asset. If you do follow this advice, make sure you really understand what “afford” means.
At this point, the real spending begins. Credit cards are used to buy furnishings and other miscellaneous home goods. Consumers are reeled in by the “No payments ’till...” signs. Eventually, credit cards are maxed out, and any disposable income is being “disposed of” by paying exorbitant interest payments. Then comes the “consolidate all your credit card debt” deal where all the debt is in one neat payment usually secured by a second mortgage on the home. Even though a vow is made never to use the credit cards again, one of life’s little surprises comes along that constitutes an “emergency” and the cards, once again, start reaching their limits.
Why do so many people find it so hard to spend less money than they earn? What can be done about it? Here are some of the top reasons for overspending along with suggestions.
- Poor planning. Those who do take the time to prepare budgets often do not figure in life’s many surprises such as repairs, medical bills, or loss of income. If you do not have a budget planned, start one. Make sure you do include a reasonable amount for unknowns. Create the budget with neither an optimistic nor pessimistic view, but one as realistic as possible.
- Desire for acceptance and/or importance. People will overspend to meet either one of these desires. The problem is, those who will accept you only if you have money are not people with whom you want to associate yourself. Importance generally comes from what you choose to do with your time, not your money.
- Purchases are often made more on emotion than reason. We all are creatures of emotion, and when our emotion and reason are in conflict, emotion will most often triumph. Advertisers and salespeople know this and sell based on our emotions. Think about it, how successful would a cigarette ad be if advertisers only listed all the practical reasons why one should smoke? When we act on emotion, we tend to overlook our budget or somehow justify the purchase. It is best to purchase large ticket items or non-necessities after at least 24 hours of consideration.
- Accustomed to a lifestyle. A lifestyle is essentially a habit of living; a habit that is not easy to break. If one’s income is reduced, the lifestyle is still usually maintained by increasing debt. Being forced to reduce the quality of one’s lifestyle can have adverse effects on one’s motivation, attitude, and overall happiness. It is best to live a more consistent lifestyle by saving and planning for times of reduced income.
If you are one of the many who are spending more than they earn, then break the habit now and adjust your lifestyle before you begin to earn more money or you will find yourself only deeper in debt. Wealth begins with good financial habits. Whether you decrease your spending or increase your earning, spending less than you earn will help you to live a life free from financial worry.
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Some discussion questions (some may not apply to this lesson):
- Have you implemented this idea in your life? How has it been working for you?
- Do you have any interesting stories related to this lesson? Do tell!
- What do you admire most about this person? (success biography days)