• WisBusiness

Friday, May 22, 2009

Living within your means



By Kevin Reardon
As a young man in my middle 20s, I came across a saying in a book that made a lot of sense. I typed the sentence into my computer at work, enlarged the font so that it took up an entire page, and then taped it the inside of my bedroom closet door. I read it every day before leaving for work and again at night before going to bed.

The sign read:

"Live like no one else WILL for a few years, so you can live like no one else CAN for the rest of your life."

The concept is simple. Live within your means and don't spend more money than you make. Reflecting back on that period in my life, I realize how frugally we lived and how happy we were in spite of having few material possessions.

Newly married, not only did my wife and I have little money, we had significant debts hanging over our heads from post-graduate schooling. With both of us beginning our careers, our income was modest at best. We both work in industries that require an investment of several years before the pay scale begins to reflect something respectable.

A year later, our first child came along. The birth was certainly no surprise but we were completely unprepared for the financial ramifications that come with having a child. I remember stacking our various bills in order of importance and then earmarking the coming month's income towards paying those bills. Although you can debate the order listed, we prioritized the bills accordingly: first came the rent check, daycare, our monthly food & credit card bill, our student loans, and then a reserve fund, in hopes of accumulating more than $79 in the bank.

What we viewed as a necessity, even back when we had nothing, was the "need" to immediately contribute towards our 401(k) retirement plans at work. Having had nothing, we wanted desperately to change that, so we aggressively saved towards retirement in spite of our ongoing concerns to meet monthly bills. Not surprisingly, we made our meager budget work by clipping coupons and refraining from spending money on items not on our list. Nowhere in our budget did we have a "Leisure & Entertainment" category. We decided that we would give up the many comforts our family and friends were enjoying for several years so we could be assured of enjoying them later in life. Ironically, between family get-togethers, picnics with friends, and movie nights at home, we seemed to enjoy ourselves quite well.

Two years later, our second child arrived. At the same time, we bought a house, my wife needed to take out a new loan to invest in her company, and I quit my job to start Shakespeare Wealth Management. Keep in mind that, although we were consistently paying down student loans, we still had significant debt balances at this stage.

The list of monthly expenses grew quickly. We persevered and made tough choices with our budget. In addition to monitoring our expenses, we both focused on increasing our incomes at work. At no point did we stop our savings program because we knew it would be too easy to spend those dollars on other items and delay our financial independence.

The differences between a "want" and a "need" can be dramatic, depending upon your stage in life. Back then, we wanted a television, unlike today when we feel as though we need a large flat screen TV. Back then, we wanted a cell phone, yet today it would be listed as a need for most people in the world. We always wanted to take a vacation, yet today many need to schedule a getaway from work.

Today's financial calamities have caused people to revisit their budgets, with many trying to carve out unneeded expenses. The irony is that we all have great difficulty carving out items that only a decade or two ago were considered luxuries, or better yet, didn't even exist (i.e. the Internet, cell phones, computers, iPods).

We have noticed that when it comes to budgeting, people fail to visualize two items. First, people refuse to believe they can live without something they have previously come to rely on and enjoy. Imagine having to live without a cell phone, computer, or even your car. Although those items are all considered needs, the reality is that if forced, we would figure out how to live without them. Recognizing this natural human emotion, we should all take pause prior to purchasing that next item, thinking how we might feel later in life if we are no longer capable of affording it.

The second observation is that people have difficulty visualizing the positive ramifications of foregoing something today with the belief that they will be able to afford something even better in the future. Our society and culture stress the importance of immediate gratification and the concept of having what we want, when we want it, and having a lot of it. Deferring gratification has dramatically positive effects on one's budget and future financial health.

Having lived on a thin budget for the better part of ten years (and the years that preceded it), my wife and I have paid off all of our debts and continue to save for the retirement we both dream of. Although we don't drive new cars or live in a big house, we feel as though we are on a path to accomplishing our financial and life goals.

The path of financial independence starts when you choose to live like no one else WILL for a few years, so that you can live like no else CAN for the rest of your lives.

-- Reardon is owner & president of Brookfield-based Shakespeare Wealth Management Inc. He is also a member of the National Association of Personal Financial Advisors (NAPFA). He can be reached at 262-814-1600 or kevin@shakespearewealthmanagement.com.

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