“The secret to happiness, you see, is not found in seeking more, but in developing the capacity to enjoy less.” – Way Of The Peaceful Warrior
I was recently sent a Time Magazine article titled “Why So Many People With Six-Figure Salaries Are Living Paycheck To Paycheck”. The title is pretty shocking, and so are the contents.
The article states that “Once coveted six-figure salaries are struggling to keep up with today’s cost of living, with more than half of people who are making six-figures still living paycheck-to-paycheck, reflected in a new study.
In December 2022, 51% of people who earn more than $100,000 reported living paycheck to paycheck, which is 7% more than the previous year, according to a survey from financial insight and advising companies PYMNTS and Lending Club.”
The article goes on to say that rampant inflation and the high cost of living in certain cities play a big role. If the high earners in our society can’t get a handle on their finances, does that mean the rest of us are in deep trouble too?
Absolutely not. I will not accept this as the new normal and neither should you.
Reintroducing The Formula
In my first ever article for The Personal Finance Playbook I mentioned a simple but powerful formula that is the key to building long-term financial security.
Spend much less than you earn and invest the surplus wisely.
This blog consistently talks about investing wisely, but today we are going to focus on the first part of that equation: spend much less than you earn.
The reason this is critical is because if you don’t spend much less than you earn, either by spending the equivalent of your income or even more by taking on debt, two specific challenges begin to take root.
- You are unable to consistently save and invest and build financial security for your future.
- You must continue to earn that level of income month after month, year after year, to pay for this lifestyle, and are highly susceptible to events that happen outside of your control such as layoffs or financial emergencies.
The principle is simple: money in > money out, but problematic if you don’t follow it.
However, if you are able to stick to it, I’ll show you how it can simplify your life, reduce financial stress, and strengthen your financial situation. Let’s dive into how to make the formula work for us.
Spending Much Less Than You Earn
There are two ways to make the formula work. Either earn more or spend less. The Time Magazine article shows us that earning more is not helping the majority of people, but it’s what the majority of people focus on.
One of the most freeing things that happened to me was when I started focusing on the spending side of things. I realized that reducing my expenses had a much bigger impact on my financial situation than increasing my earnings.
Why is spending less so impactful? One big reason is taxes.
You have to pay taxes on additional income. You don’t when you reduce spending.
If you cut $250 from your monthly spending, that gives you an extra $3,000 each year. If you instead wanted to keep your current expenses the same and earn more, you have to pay income tax on that extra $3,000.
So $3,000 you save is $3,000 gained, while $3,000 you earn gets reduced by taxes.
A Wedding Example
I have a friend who is planning a beautiful wedding that is likely to cost around $40,000. The venue is gorgeous, the guest list number is reasonable. As crazy as it is, this is not an outrageous cost for a wedding these days. Many weddings cost much more.
The issue is, my friend only has $20,000 saved up, so he has a choice to make. He and his fiancé can try to find a way to bring in an extra $20,000 in income through additional work, but they will actually need to earn $25,000 because $5,000 (25%*) will be taken out for taxes.
They could also take out a loan, but with ultra high interest rates this debt would likely haunt the newlyweds long after the wedding.
The other option, while not nearly as instagram worthy, is to let go of what they wanted their wedding to look like and become creative in ways to dramatically reduce the cost. It’s okay to say “We’re not millionaires and our parents aren’t either. We love each other and this is what we’ve come up with and we wanted to share it with you.”
If they found a way to reduce their wedding cost by $20,000, they’d be all set, but if they want to have their original wedding, they would need to bring in an extra $25,000 in income.
Opting For Less
It generally takes more effort to consistently earn more and maintain that level of income rather than simply spending less. There is nothing wrong with increasing your earnings, but it does require you to get a raise at your current job, find a new one, or start a side hustle.
In my experience reducing expenses often takes stress off your plate, while increasing income often puts more on. If you enjoy working, that’s great, but there is something quite liberating about having less and less money go out the door each month in order for you to live your life.
I also happen to know a couple that spent under $5,000 on their wedding. The rehearsal dinner was in the groom’s parents backyard, they got married at the courthouse and had a lovely dinner for 35 people afterwards, went to a bar to celebrate, and instead of asking for gifts they set up a honeymoon fund for people to contribute and went to Italy. They are also living with his parents for the time being to save up.
I jokingly asked them if they regret having had a “cheaper” wedding and if they love each other less because of it. They both smiled and said they wouldn’t have wanted it any other way.
They have started their marriage on solid financial footing by finding creative ways to reduce their expenses.
How To Spend Much Less Than You Earn
One of the biggest reasons I have not needed to work for the last few years is because I have kept my major expenses low and am perfectly fine with it. Other than large one-off events like weddings, I recommend focusing on your biggest recurring expenses first, which are likely to be housing and transportation costs.
Housing
I live in a modest one bedroom apartment on the south side of Chicago with my dog Bailey. If my rent was high, I would demand much more from my apartment, but because rent is reasonable, I’m okay that it isn’t perfect.
I recently had the opportunity to move into a much larger unit with a better view and pay a bit more but I ultimately realized that I don’t really want the extra space. I would have to buy more stuff to fill it with and it would be harder to keep clean.
To me, my humble abode is good enough, most of the time, and the affordable monthly rent has a lot to do with that.
A solid personal finance adage is to never let your housing expenses exceed 30% of your take-home pay. It’s just not worth the financial stress that comes with finding the biggest, nicest place you can afford.
And remember that rent is the maximum you’ll pay each month while a mortgage is the minimum you’ll pay each month.
Transportation
I haven’t owned a car in many years. Yes, there are days where it would be nice to have a car, but the majority of the time I don’t need one. I walk or bike 98% of the time. It’s built in exercise and gets me outside and into the neighborhood every day. I’m a fan of self-powered locomotion.
If I were to get a car, I’d make sure to buy used because I’d only need to use it sparingly. And wherever I live next, I will make sure that the area is highly walkable where having a car is a luxury, not a necessity.
Because my rent is not high and I’m not paying for a car, it offers me tremendous financial flexibility and low financial pressure.
If and when I decide to work again, it won’t take much income to cover my expenses, certainly not $100,000. I much prefer this financial situation to a more expensive lifestyle.
Other Ideas
I know a couple that doesn’t really go out to eat. Instead they make most of what they eat from scratch. They have learned to enjoy cooking for themselves and others, they bake their own bread and even make their own ice cream. It is a tremendous source of pride for them.
They live together in a nice but reasonably priced apartment, and they do not own a car. Instead they both have e-bikes that get them pretty much wherever they need to go quickly without breaking a sweat.
(On that note, the other day I saw a dad riding an e-bike with his two young kids in the back with their little helmets, that’s what I’m talking about!)
And because this couple has a good handle on their major expenses, they use a portion of their surplus to travel internationally. In fact, we tend to have to make our dinner plans in advance because they are out of town so often.
Of course, family dynamics, like having children, can add complexities to your financial picture, but there is an opportunity for each of us to get creative and take a hard look at the big expenses (and then the other expenses) and see where you can reduce them or even take them out completely.
I have found that simplifying one’s life in this way comes with immeasurable benefits, not just the financial kind.
It Comes Down To Trade-Offs
My life is simple but does that make it perfect? Not even close. I still have my fair share of problems. The winters here are cold and cloudy, depression and anxiety still follow me, it takes extra planning to visit friends and family in other parts of town, and I often struggle to loosen my frugality in areas of life when it would be beneficial to do so.
But I am beyond grateful that I can read an article about high earners living paycheck to paycheck and know that I have made choices that have simplified and lowered the demands of my life. This has substantially strengthened my financial situation and made me much more resilient in an increasingly expensive world.
Intentionally keeping expenses low has helped me learn how to not only get used to, but actually enjoy living with less.
Where will you begin?
Live simply, live differently.
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*Hypothetical tax rate
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