Live Below Your Means – Part 1 of 4

The number one reason why Americans have a hard time making ends meet is that they don’t live below their means.  Our culture has a “buy it now and pay later” mentality.  All this living at or above your means is costing yourself financial freedom.

In part 1 of 4 of this series I will explore a typical example of a semi-major purchase.

Buying furniture is something that we all need to do.  After all, we need places to sit, eat, and sleep.  However, many people when they need a new couch, buy the best couch they can afford.  They have the mentality that since they can afford it, they should buy it.  Should you?  Let’s crunch some numbers:

$2000 in discretionary funds

Scenario #1
 
Today:

$2000 – Brand new leather couch purchased

10 Years Later:

$0 – Leather couch is in the trash

Scenario #2

$1000 – Less expensive couch purchased
$1000 – Invested into stock market earning an average return of 10%

10 Years Later:

$0       – Leather couch is trash
$2500 – Investment has now grown approx 250%

As you can see in scenario #1 you only bought a depreciating consumable good.  You now need another couch and none of your money worked for you.

In scenario #2 you also bought a couch, a depreciating consumable good, but one that was below your means.  You then invested the remaining $1000 you had and 10 years later, that investment was worth $2500.  You allowed your money to work for you.

You may be thinking “big whoop, you now have $2500 more after ten years.  $2500 after ten years is chump change for such a long time”.  If you are thinking this, you are missing the point.

What about the $1000 you could save and invest the next year, and every year thereafter for the next ten years.  Your original investments will be, on average, worth $2500 10 years later every single year.  So you now have thousands of dollars in investments, not just $2500.

In part 2 of 4 in this series, I will be writing about savings in everyday purchases.

* Note that I rounded numbers in some instances to make it easier to follow.

Written by admin on June 30th, 2006 with 3 comments.
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