What Happens when you Live Within Your Means

Small decisions add up over time.

by Colter Reed
2:07 read (647 words)
A piggy bank stuffed with money
by Colter Reed
2:07 read (647 words)
A piggy bank stuffed with money

I saw this in a recent Blinkist Minute, an email promoting their abbreviation of Scott Galloway’s The Algebra of Happiness.

Now, imagine you’re earning $40,000 per year in passive income, while spending only $35,000. That means you’re simultaneously meeting your needs and making money – all by doing nothing! You have no financial need to work. You can kick back and relax; for all intents and purposes, you’re rich!

Contrast that to a family that earns $2 million per year, but spends $2.5 million on luxury goods. They’re in the red every year. So, sure, they’re millionaires – but in another sense, they’re poor.

First, that’s not what a millionaire is. A millionaire is someone whose net worth (what you own minus what you owe) is $1,000,000 or more. It’s not how much you earn or spend in any given year.

But setting that aside, someone’s read their Dickens. From Wilkins Micawber, an optimistic clerk in Charles Dickens’ David Copperfield (1850):

Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

And I’m sure this nugget of common sense predates them both.

The stability of your financial situation depends more on the direction you’re heading over the long term than where you’re at. If you live within your means, you have enough for today and can prepare for tomorrow.

Let’s circle back to Blinkist’s “poor millionaire” family. Every year, they’re spending $500,000 more than they earn. They’re spending capital, which means they have less invested to grow for the future. Let’s assume they are millionaires for now, since they can afford to do this in any one year.

If this keeps up, they’re not going to be millionaires for long. If you have $10 million, you’re in the top 1% of wealthy individuals in the United States. Do you know how long it takes you to burn through $10 million at a rate of $500 thousand a year? Just 20 years. A newlywed couple that started out in the top 1%, by the time their kids went to college, they’d be broke. (If they’re billionaires, they’d be fine, but no one achieves billionaire—or millionaire—status by burning through $500,000 every year.)

On the other hand, let’s say our newlywed couple is starting life together at the bottom 10% of US wealth: they have a net worth of negative $1,000. But they get focused. They live within their means. After a few months, they’ve saved up a $1,000 emergency fund. A few months later, they pay off their debt. They’re heading in the right direction.

As their income grows, they keep their lifestyle in check. Their expenses grow more slowly than their income does. Soon, they’re investing a very achievable average of $1,000 per month between their 401(k) (with employer match) and their IRAs. Over the same 20 years, they’ve set aside $240,000. That right there is a respectable chunk of change. But they’ll have more than that. They weren’t sticking that money under their mattress, they were investing in the market. After factoring in the market’s 10% annual growth and interest, their nest egg is worth more like $750,000. I think they’ll be able to send their kids to college.

If they just let that $750K sit there for another 20 years—they don’t take anything out, but they don’t put anything more in—they’re going to retire with a nest egg of over $5.5M.

Let that sink in.

They didn’t inherit anything. They didn’t win the lottery. They didn’t go on Jeopardy. They just lived within their means. They spent less than they earned. After 23 years, they were everyday millionaires.

One of the keys to building wealth—and, as Galloway asserts, happiness—is learning to live within your means. It’s a small everyday decision that makes a huge difference in the long-run.

Question: What have you done today to be more content within your means? Share your thoughts in the comments, on Twitter, LinkedIn, or Facebook.