The worst has happened. You lose your job because of a circumstance far beyond your control. Maybe you even have to go on unemployment to make ends meet. Life is full of curveballs, but they don’t seem to break as much if you are living within your means.
It’s typically only when things get tough do we realize the American way, or our way is not so sustainable financially. Society will have you believe that car loans, a fancy house and credit card debt is the American way. In fact, the financial health (i.e. GDP) of our country depends on it.
I’m talking about spending outside of your means for housing, on your car, and with a credit card for things, you can’t yet afford – the three silent budget killers that tend to increase with lifestyle creep.
The purpose of this article is to show you how much would-be money adds up over time by living more within your means. That is not buying the advertising, the great deals, and all of the things America justifies you having or needing. If you spend a little less in just three major money categories, you’ll be significantly better off over the long term and stack more dollars. How would you like to save or get back an additional $11,616 per year?
The numbers show that the millennial generation – people between ages 23 and 38 – fall victim to the following:
- An average of $4,712 each in credit card debt in Q1 2019, according to Experian data
- An average auto loan balance of $18,201, according to Experian data from the second quarter (Q2) of 2019
- Spend beyond 30% (up to 36%) of their household income on housing – whether gross or take-home pay
According to a business insider article on millennial personal finance,
A quarter of millennials say most of their debt is credit cards, not student loans. Furthermore, Despite credit cards being the biggest source of debt for 1 in 4 millennials, about 22% don’t know the interest rate they’re being charged. This isn’t an issue if you don’t carry a balance but for those who do, the interest rate for a credit card is typically between 18-28% per year.Business insider
Worse yet, most indebted Americans surveyed (34%) don’t know how much of their monthly income goes toward paying down their personal debt. If you look at your budget, it’s no secret that these extras or “averages” add up in big ways. Sometimes even in ways that seem completely wasteful or that don’t provide the value you paid for them. It’s time to take the first step to learn the numbers. Even if you don’t like numbers, there are many simple tools and calculators out there that will do this for you. Or ask me, I’ll work with you.
Remember I talked about the three silent killers? We are going to break these down that illustrates how the would-be (opportunity cost) payments add up.
First, your credit card
For the purposes of this article, we’ll use the average millennial credit card debt. This means you’re carrying a balance of an average of $4,712 at an average of 24% interest, and your minimum payment is $200. Remember, what I’m trying to show is the dangers of carrying a balance over time and the power of that $200 not going towards a credit card payment. And how much you lose in interest.
The picture above shows that you would pay $1723 in interest over 33 months which is $52 per month. Add that on top of your $200 minimum payment and you have $252 per month. This means that you would have an extra $252 a month if you chose not to buy stuff you can’t afford. Of course emergencies happen but you’re on the hook for all of the fancy upgrades, latest models, new outfits, the list goes on.
Remember, that $252 number for now.
Next up, your fancy car
Again, we are talking about the american way. The american way means you get a new job and you buy a new car. No questions asked. After all, you earned it right? As you guessed, your car comes with an opportunity cost too.
Remember, the average monthly car payment for a new vehicle is $554, and the average monthly payment for a used car is $391. Forget about interest on top of that for now. On a side note, if you really want to know how much you’re planning to pay in interest over the life of the loan for your car, take a look at Nerd Wallets Auto Loan Calculator.
The graph below is just showing some average numbers. Take them as you will but i’ve read they are probably not too far off.
Yes, you still need to drive a car but do you really need a fancy one? Sure maybe that is your rich life in the future but you got big dreams now, right? Do you need a $500 truck payment now when you have a mountain of debt to take care of that’s silently racking up interest?
So let’s say you have a $27,000 new car over a 60 month period with 4.5% interest. Your payment would roughly be $428.79 + $45 (interest) = $473.79 per month.
Now, run another scenario. What if instead of that $350-500 per month on a new car, you found some sweet used car for half the price? Lets say, $150 per month (plus maybe another $15 in interest) or even lower!
If you took the lesser option, the new car at $473 – $165 (modest used car with interest) = $308 dollars saved per month by choosing a lesser car option. If you have a huge car payment, you are robbing yourself of the opportunity cost to spending that money elsewhere. I’m not saying you should drive a beater your whole life. Find a cheaper ride and stack those dollars you’re saving and put them to better use towards your amazing life.
Remember that $308.
Again, what I’m trying to show is the opportunity cost of your decisions and reasoning that you’re an average American. So far we’ve got two would be payments to add up. Your credit card debt payment of $252 per month and the $308 car payment for a total of about $560 per month you’re saving.
You see where I’m going with this?
Finally, your housing
Dave Ramsey will tell you that housing should be no more than 25% of your take-home pay. I’m on board with anything between 25-30%.
Unfortunately, the government, mortgage lenders, realtors and people standing to make money off of you will suggest otherwise. The % allocated for housing ranges suggested by these folks is anywhere from 25% – 36% of your gross salary. This gross salary calculation difference is important.
The ratio or total dollar amount for your gross salary is significantly higher because your gross salary does not account for your taxes, health insurance, or retirement funds – all of which eat hundreds of dollars away from your take-home pay. Take a look at your paycheck in greater detail next time and play around with this calculation yourself.
I personally believe that this number should be only calculated based on take-home pay for a number of reasons but I digress. One of the bigger reasons folks believe that 25% of your take-home salary is most appropriate is because when shit hits the fan, you want to make sure you are able to make the payments and don’t lose your ass. Like what happened to a large number of folks during the 2008 – 2010 housing crash. How soon we forget. Do your homework and read about the 25% housing rule and you’ll get a better feel. Moving on.
Since I don’t have your take-home pay, I’ve used a gross income estimate in the table below to illustrate what this means for your housing budget.
The purpose of this chart is to show you the dollar difference between what society tells you you can afford vs. what you want to actually afford because it’s right for your own financial freedom.
Let’s say you make $50,000 a year and you’re a single dude. Since you’re single, you’ll just choose to rent for now. Going by the 25% housing rule, your place should be somewhere in the range of $1050 per month. But, if you are living a baller life and needing to live a life of luxury at 35% of your pay, that’s an extra $400 more per month than what you probably should be spending on housing. For now at least. After all, if you’re average, you’re probably in debt as the rest of America.
Remember that $400 extra a month you’re saving by not living above the 25% line.
Note on housing:
Before you yell at me and come after me with pitchforks, of course, there are exceptions for the big metros where housing costs and rents are ridiculously high. Of course, you might not have an option at a decent place for around 25% of your take-home pay or even gross pay.
If this is the case, you have to understand the implications for the rest of your budget or what happens when unexpected expenses in life come up. Spending more in one area should hypothetically mean you spend less in another without putting what you cant afford on your credit card!
Watch how it all adds up
Lets recap the would be or opportunity cost payments of the three silent killers.
- Credit card – $252
- Car payment – $308
- Housing – $408
- Total opportunity cost per month of living outside your means = $968 per month
That escalated quickly. Based on these pretty modest calculations, you can see how the three silent killers can add up quite significantly per month. Now, here is how you bring it all together.
For a total of $968 per month saved in would be payments, that is $11,616 saved per year for Mr. Solo Dolo and for Mr. and Mrs. Millennial Couple (assuming the average credit card debt and car per person with combined housing), $18,432 per year. What would you do with this money?
If you just saved this money over a 10 year period you would have over $100,000. If you invested just $500 per month, roughly half of this money savings into a Roth IRA at age 30, you would have over $550,000 at age 60 + $173,000 from the rest of this original $938 per month in your savings account over 30 years.
Can you say down payment on a house, epic trip, emergency savings for a job loss, a baller ass ride bought free and clear, great nights out, should I continue?
Gamify this. Think about your financial freedom and make it personal to you. Your amazing life depends on this.
Living within your means
Hopefully this article has helped you change your perspective on the three silent killers of life and how the “would be” costs can accumulate to something amazing. More often than not, living within your means does not mean pinching pennies. There are ways to live a fantastic life without spending extra for it! But until you define what financial freedom means to you, it’s hard to get motivated to make a positive change.
When the next shit storm comes, which it will, the government may not be in a position to bail us out like this. It may be a different shit storm. History repeats itself – whether that be a natural disaster, unemployment, pandemic, medical diagnosis, you name it. That leaves us with the critical task of putting ourselves in a better financial position to weather any storm, employed or not.
You always have a choice to make a change. Choose to live within your means in a way that aligns with your values and makes you happy without relying on debt to get you there. With smart financial decisions like investing on top of that, you position yourself to live an incredible life. It’s time to take a step towards the life you truly want to live with the financial freedom and happiness you deserve.