The Meaning of 'Living Within Your Means'
by Walter Updegrave
March 12,
2009
[Continued,
page 2]
Make regular saving a priority. There are two main reasons you need to save. One is to build a reserve to help you deal with normal financial setbacks such as a layoff or big unanticipated expenses that you can't meet from your salary. To create such a cushion, you've got to plow some money into a secure stash like a savings account, CD or high-quality money-market fund. People can disagree about how much is necessary, but three to six months' worth of living expenses is a reasonable guideline.
But you also need to save so that you can support yourself later in life. You know that at some point you'll no longer be able or willing to work. The only way to assure you'll have resources to fall back on at that time is to spend less than what you earn today so that you can spend it in the future.
Essentially, that's what the Social Security program is all about. The payroll taxes deducted from your paycheck go to current retirees who have previously paid their payroll taxes. But unless you don't mind living on Social Security alone—which isn't very cushy, as you can see by checking out the Social Security Administration's Retirement Estimator tool—you also need to save on your own.
Of course, there are other reasons to save: to buy a house, educate yourself or family members, start a business, to name a few. And, admittedly, some people may simply not make enough money to cover even their basic expenses. But such dire circumstances aside, if you're not at least saving regularly for the two main reasons I've mentioned, then you're not being financially responsible.
Control your debt. I like to divide debt into two categories: good debt and bad debt. Good debt is the money you borrow for something you truly need or that can enhance your financial security or that of your family. Here, I'm talking about a mortgage to buy a house, a loan to buy a car, borrowing to fund a college education or a business.
Bad debt is the debt you take on for things you could do without. Tapping home equity to fund lavish vacations would be an example of bad debt.
Of course, the line between good debt and bad debt can get blurry. For example, the money you borrow so you can have a car to get to work certainly would constitute good debt. Borrowing for a $70,000 Statusmobile when you're earning $50,000 would push that debt into the bad category. The same principle applies to buying a more expensive house than you can actually afford, even if some stupid or unscrupulous lender is willing to give you the loan.
By the same token, it's not as if every time you borrow for something that's not an absolute necessity that you're being financially reckless. An occasional splurge is fine; indeed, it can make life more pleasant. While I certainly don't advocate using credit cards as a way to live large, as a practical matter it would be unrealistic for most of us to live our lives completely on a cash basis.
The key when it comes to debt is to avoid clear abuses like borrowing heavily for things you don't need or can't afford and, most important, making sure that you're able to comfortably manage the payments on whatever amount you borrow. People can disagree about what portion of your budget should go to debt service. But I think warning flags should go up once you start devoting 40% or so of your income to repaying debt, if not before. (To see how your debt holdings compare with those of other Americans, check out the debt section of the Fed's Survey of Consumer Finances).
There are certainly plenty more things you can do to improve your financial prospects—work hard, manage your career, invest prudently, monitor your finances periodically. But if you save on a regular basis and avoid bingeing on debt, you'll be living in a financially responsible way. As for whether this constitutes living within your means or living below them, I'll leave that to you and your co-worker to settle.
<
Previous Page | 1 | 2
The
opinions and views expressed in this publication are for general
information only and are not necessarily those of Mutual of America
Life Insurance Company.
Return
to top | Print
Print