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MyQuo.com » Blog Archive » Live Below Your Means – Part 1 of 4

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.

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3 Responses to “Live Below Your Means – Part 1 of 4”

  1. 30 vs 15 Year Mortgages - MyQuo.com Says:

    […] It should also be noted that the payments for the 15 year loan are $359 higher than the 30 year loan.  This should not be a problem if you are living below your means.  In addition, the mortgage payments should be a little lower than stated above because you can often receive a lower loan rate for a 15 year loan as opposed to a 30 year one. […]

  2. Live Below Your Means - MyQuo.com Says:

    […] Live Below Your Means – Part 1 of 4 (6.30.2006) […]

  3. How To Pay Off Student Loans - MyQuo.com Says:

    […] The #1 reason why people have a hard time paying off their bills is because they don’t live below their means.  They are so busy spending all of their money that they don’t have anything left to invest or to pay down their debts.  No amount of money is going to fix this problem.  The more money that comes in, more that goes out. […]