Monday, August 18, 2008

Making a living vs. making a life – a study into Common Cents FAQ

A few days ago, Mr. Cents and I visited with a close friend, Mr. Moneybags, who asked for help with his financial situation. The why isn’t important – this has been just one of many friends who’ve asked our financial advice. Perhaps it is because of Mr. Cents’ flirtation with financial planning, perhaps it’s the blog, or maybe it’s just because we make it look easy. But I can assure you – it only LOOKS easy. Like marriage, you have to have a plan and work at it. Yep, I am talking about living beneath your means and (gasp) following a budget.

Building the case for the value of living on a budget, Mr. Cents explained our financial situation to our troubled friend: When Mr. Cents and I started dating over 4 years ago he had over $75,000 in credit card debt, auto loans and student loans. By diligently following a budget, Mr. Cents managed to pay off over $60,000 in consumer debt in the past 4 years, including the entire credit card balance before we were married. These days, we still continue to budget but instead have a home, two cars paid off in full, minimal student loans and save a significant part of our salaries for retirement. Life is good!

Enter criticism reel into the conversation, aka why what works for you won’t work for me.

Moneybags: But you guys make more money than I do, so it’s hard to compare.

Cents: The foundational concepts we live under – spend less than you earn, etc. - are applicable to anyone. Besides, we have a much higher cost of living and need to support 2 people. Double income but also (in some cases at least) double the expenses.

Moneybags: I can’t possibly have a budget line item for milk (enter sarcasm). A zillion budget categories are just out of the question.

Cents: Not everyone is a strict category budgeter, but that’s something that evolved over time with us. At first, our budget was nothing more than knowing which bills needed to be paid when. The categories are actually based on our spending over time. All the categories do at this point is help us predict income and expenses. We live off of credit and debit cards so everything in the budget is already tracked for us. It’s really not as hard as one might think over time. But even if you don’t want to use an electronic system, there are plenty of other ways to budget. Some people like to use a cash envelope system; some people spend 60% of their income on fixed expenses and the remainder on variable costs/emergency expenses. There’s something for everyone, the bottom line is increasing your worth over time, rather than increasing your amount of stuff, which usually increases your debt.

The conversation goes on like this for a while, and finally Mr. Moneybags came out with a ringer: “What if you died tomorrow. Wouldn’t you have a lot of regrets? If you aren’t doing the things you want to do you aren’t living in the moment.” The answer got its justified answer after much introspection.

Cents: If I died young or was permanently disabled early in life I might wish we had done a few more things but I really don’t miss out on anything by sticking to a budget. Overall, we have a very satisfying lifestyle and are content with life. Because we can plan for things in the future and there is flexibility in the budget, it takes the edge off anything material. And the fact that we are now financially secure and have money in the bank to prepare for any kind of emergency is much more valuable than anything we could buy.

I’ll admit that occasionally I feel deprived when I have to tell myself not to buy something ($300 Coach leather satchel, why do you tempt me so?), but that feeling is less and less all the time. While I do support the idea of living your life to the fullest, my idea of fullest sometimes changes over time. I’ve actually never had the mindset that I might die tomorrow so I need to buy x today. Sometimes we have to go over the budget, and that’s ok. Better to have a life well lived than feeling financially deprived ALL the time. On the other hand, it’s also helpful to make sure that I’m consuming for the right reasons, not just shopping without thinking about it. Financial security keeps me motivated and is a much better feeling for all the time instead of living for just in case. After all, the $300 bag is not going to help me sleep any better at night.

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