Friday, April 20, 2012

Act your Income!

When your income increases, it is tempting to increase your spending.  Living within your income is hard to do.   Living below your income range, even harder.  But if you want to accumulate wealth, rather than squander it, you have to avoid lifestyle creep.

We've been debt-free for about a year now.   It ain't easy.   Why is this?  Well, the temptation to spend is always there, and only now, when we are forced to (or are forcing ourselves to) pay cash for everything, is this readily apparent.

And like everything else, it is the little things that add up.  We used to laugh at our older friends for buying cheap booze or wine.  We figured, "Hey, it's only a buck or two more for the 'good stuff' - why be cheap?"

And so on, down the line.  We were young and "had money" - why not spend it?  And I rarely looked at the prices of things - of anything - unless I couldn't qualify for the loan to borrow it.

And so, credit card debt gets rung up, a little bit at a time.  A trip to Lowe's here - some plants and stuff for the house, $100.  What's the harm?  But little purchases like that add up - over time - and you end up in debt.

When forced to pay cash for everything, you realize how poor you really are - and how expensive things are, and how you've let your lifestyle get expensive.   Over the last two years, I have been cutting expenses to the bone, and I realize how my lifestyle inflated since age 20, when I was making maybe $15,000 a year, to age 45 when I was making ten times that amount.

With each increase in pay, came an increase in spending - and this is a very dangerous thing. Big checks seem like a lot of money.  But you have to realize that you have to pay your bills - including the IRS - first, and pay yourself by building up an Estate.

If you are married, this problem is compounded by two, particularly if both of you are spendthrifts.   Trying to control spending becomes a "race to the bottom" and if you try to rein in your spouse's spending, well, it will get ugly in a real hurry. Suddenly, every purchase you've ever made will be called into question, just because you asked whether they really needed that 99th pair of shoes.

But on the other hand, if this is something you can work on together, it can strengthen a relationship significantly.  Working out a budget, planning on goals for saving - and for spending - can be a lot of fun.   Each purchase is not just something bought casually and forgotten almost immediately. You sit down together and decide what it is you really want to do with your money, instead of just spending it wantonly.

For example, we had planned on installing some plants in our front yard to act as a screen from the road.  Some palm trees and decorative grasses which would require little water, seemed like a good idea.   But the more we thought about it, the less sense it made.  Why plant plants for other people to look at?   The front lawn is fine - let it be.   If you are going to plant something, put it in the back where YOU can enjoy it, right?

You can bankrupt yourself doing "home improvement" projects like that - and add little or nothing to the value of your home.  Just walking away from it turned out to be the best idea.  And thinking about this and discussing it, for weeks, even months, turned out to be the key.   In the past, we would have impulse-bought it all, over a weekend, using a credit card.   Bad idea.

Or take those 99 pairs of shoes.  In the past, when we bought shoes, we would just go to the store and buy whatever was on sale, without thinking.  If something looked attractively priced, we'd buy it.  As a result, we have probably 20 pairs of shoes apiece, most of which are never worn, or worn just often enough to justify not throwing them out or sending them to Goodwill.

And that is the problem with the "hey, let's just buy shit" lifestyle - when you are older, you will be stuck with a lot of merchandise that was bought indifferently at an earlier age.  For all I know, my Dad is still wearing that Yellow Parka.

We finally broke down and bought new sneakers the other day. Good, comfortable shoes are important, if you don't want back problems when you get older.   And the pairs we had were great, but wearing out - after nearly seven years.   We tried on other shoes at the Sporting goods store, but again, it was a matter of buying "what they had on sale" - not what we wanted.   We resisted the impulse to impulse-purchase junk that we didn't want (if you buy crap, even "on sale" there is no savings - particularly if they are uncomfortable shoes that end up languishing in your closet).

So after literally months of deliberation, I bought the same pairs online, aggressively shopping on price.  The me of five years ago would never dream of spending so much effort on such a trivial purchase.   But good shoes last years, so there is no point in buying "on sale" junk and hoping you get lucky.

And so on down the road.   We would like to take a river cruise on the Rhine some time.   If you book these well in advance (a year or so) the prices are steeply discounted.   At first, I thought about taking a "deluxe" trip of two weeks, with a balcony cabin, etc.   But then the costs started escalating over $10,000, and suddenly, it seemed far out of reach.

In the past, I would have called up and put that on a credit card.  Being forced to pay cash, we had to re-think it.   So we will book early, pay a down payment, and then pay the rest over time.  And we will get the standard cabin, thank you.   And a week is more than enough for us.   The cost will be far less and it will be paid for, not put on a card and paid for, over time, with tons of interest.

Yes, this is hard.  And you realize you are not as wealthy as you thought you were.  And oddly enough, you realize that other people are spending like they are wealthier than they think they are, which gets uncomfortable.   A friend recently revealed that he has very little money saved in his 401(k) - about $4000 or so.  He lamented that it was not "making money for him" and of course it never will.   You have to save money to make money, and $4000 isn't going to magically transform into a million bucks, overnight.  (Although, if you put that away at age 20, it would be worth $84,009.81 at retirement, at a 7% annual rate of return).

The funny thing was, he goes out to lunch every day and pays about $10 to eat, which he puts on a credit card.  We make sandwiches and bag our lunches.  We are "wealthier" than he is, in terms of assets and income, yet we act poorer.  Actually, we just act our income - rather than how we wealthy we believe we should be, or think we are.

Acting your income is very hard to do, particularly when there are so many "cheap" consumer goods to buy these days, and plastic credit cards are to tempting to use.  But if you don't, over time, you will accumulate debt, and wake up one day and wonder "how did I get here?"