Counter Culture Savings

The British Royal Family’s fortune is estimated to be in the billions. Hearing figures like that made it hard to understand how a member of their family could be near broke. But that’s exactly what’s happening.

High Living, High Spending is a headline ripped from the pages of BBC News. The headline is of course referring to the current scandal of Sarah Ferguson, the Duchess of York.

The Duchess was secretly filmed by a tabloid magazine selling access to her ex-husband for $500,000.

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The duchess has now gone on the offensive blaming her divorce settlement, which grants her £15,000 (about $22,000) a year.

But as she offers her apologies and reasons it doesn’t seem Fergie has learned anything. Soon after the scandal broke reports surfaced that she jetted off to Naomi Campbell’s 40th birthday party. Not exactly the actions of a woman who lives off of $22,000 a year.

It seems the Duchess has the same disease many Americans have, she lives beyond her means.

It’s easy to say that won’t happen to me. Though by today’s standards even living within one’s means isn’t good enough.

Personally, I don’t like the phrase “living within your means”. The phrase sounds too negative. Living within your means sounds like you are spending everything that you earn and that sounds like living paycheck to paycheck.

We all know people who think like that. They make about the same as you do but own a bigger nicer house, they seem to go on more vacations and have a better car than you.  If all your friends spend every penny they make it is easy to feel like you are doing well by just not going broke. Our own government has repeatedly voted against an amendment requiring them to balance the budget. With role models like this it’s no wonder people think living within their means is for suckers.

So what does living within one’s means really mean? Terms like within your means, below your means and above your means can mean different things to different people. One person could see living within their means as spending only what they earn, no more. But it’s perfectly reasonable that someone else might think that definition is no good.

Another person might define living within their means as not spending more than they earn but also believe that saving money is a necessity. And there are other issues to consider, such as debt. Suppose you don’t spend more than you make and you also manage to save regularly, but a large chunk of your budget goes to make the minimum payment on huge credit-card debts you’ve racked up. Are you living below, within, or above your means then?

Today I will show you what you should be spending and what you should be saving. No more keeping up with the Joneses. Today you will learn to keep in line with the Patterson’s.

First off savings. There are two types of savings you should have. One for “Rainy Day” expenses and one for retirement.

At a minimum you should have enough money in your Rainy Day account to cover six month’s worth of living expenses.

You can figure out what your monthly expenses are by adding up your fixed monthly bills- mortgage/rent, phone, utilities, car, insurance, debt payments; and then adding what you spent on food, entertainment, clothes, gifts for others, and other non-fixed expenses. The easiest way to get these figures is to pull out your bank statement from last month. Don’t tell me last month was an exception. Bologna! You spent it so it counts as usual spending.

My advice is to have more than six months worth of day to day expenses saved up.  In this economy having enough money to cover six months worth of living expenses might not be enough. If you lost your job today are you positive you could find another job that pays you the same amount of money and gives you the same benefits within six months? National statistics say you probably can’t.

I am of the school of thought that you need a year’s worth of expenses saved. Having that much money is a more financially sound way to live.  This will also allow you flexibility if that new job is in a new city and relocation is necessary. And remember after a few months your Cobra health benefits will run out from your previous job and you’ll be paying a higher health insurance premium. Make sure to take those higher premiums into account when squirreling away your money for that rainy day.

The second type of savings you should be accumulating is for retirement. It can sometimes seem light years away but you don’t want to be stuck working till your 75 because you didn’t plan far enough ahead?

At minimum you should put 10% of your income away for retirement each year. Also, sign up for your employer’s 401(k) and deposit up to the amount that they will match. For most companies they agree to match dollar per dollar up to the first 6% of the money you put into the retirement account. These matching funds are free retirement funds, so take advantage of them. Many employees do not contribute the maximum amount, and so they miss out on free money from their employer. This is a common mistake, and a very costly one.

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Better retirement savings advice is to put 30% of your income away for retirement. I bet you balked at this percentage. The little voice in your head says, “30% is a crazy high amount!” It’s not though. I know you’re used to hearing that the rule of thumb is usually 10%. Saving 10% of your income likely isn’t adequate unless you get a very early start or believe you can count on other generous company perks – like a pension or employer-paid retiree health care, both of which are becoming increasingly rare.

If you start this when you are 25 then you can save a little less. I recommend 20% of your income. Those extra years allow compounding interest to work their magic. If you are starting later in life, your 40’s or 50’s…it’s probably too late for you. You’ll have to save over 50% of your income and even then you’ll most likely have to work beyond age 65.  If this seems unreasonable you’ll need to find additional streams of income.  There are numerous opportunities provided in League of Power newsletters every week.

Spending

Now onto what you should be spending. Many financial lenders will allow you to spend up to 36% of your total income on a mortgage. That’s ludicrous! If you’re already putting 30% of your income away for retirement and rainy day savings, taking away another 36% would mean you only have 34% of your income left to spend on everything else. If you net $2,000 a month and save 30% of it ($600) each month and spend 36% of the remaining $1400 a month on your housing that leaves you with only $900 to pay all your other bills and expenses!

The better advice is to spend only 25% of your monthly income on housing. And I don’t mean just your mortgage. In my way of thinking that 25% should include property taxes, insurance and any homeowners association fees.

The rest of your spending really depends on how much you make. No percentage can accurately tell you what is too little or too much. You can however take a look at what other people are spending in each category. The Consumer Expenditure survey provides data on the buying habits of the American public and breaks them down into many smaller categories.

If all these percentages seem out of line to you. Then you need to take a hard look at yourself in a different way. This keeping up with the Joneses mentality, get a quick fix, instant gratification lifestyle is unsustainable.

Remember when having debt, walking away from your mortgage, and using credit cards to finance your life held a distasteful public stigma? Remember when people who broke these social norms were chastised and thought of as outsiders?

A few decades ago any one of these things triggered thought of moral failure at the inability to delay instant gratification and take care of your family. I realize I am going against the grain when I preach about the virtues of living within one’s means. The days of easy credit, low interest loans and 50 year mortgages have allowed many Americans to substantially improve their quality of living over the last few decades.

When you spend less than you make, you are buying flexibility and financial freedom. You gain the ability to change jobs to one that you love or move to an area you’ve always wanted to. You are buying the ability to say yes to the things that matter because you save on the areas that aren’t as important to you.

Don’t worry about the Duchess of York. I am pretty sure she’ll be fine. I can already see how things will end for her. After countless paid interviews and attempts to repair her public image she’ll get a book deal. Another down and out media figure who will salvage their career and money with their story of “Oh look at me. Feel sorry for me.” Another terrible role model we’ll see in a positive light.

I’d like to see the Duchess try to live within her roughly $22,000 a year allotment before she gets the book deals, speaking engagements, endorsements, and gifts that are soon to be showered upon her. I weep for the days of reality when I hear a story about a person who has really mucked up their finances and went onto learn their lesson but still had to pay hefty consequences for their wasteful, reckless, spendthrift ways.

Keeping Money In Your Pocket,

Nancy Patterson

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