In a recent post on his site, online marketing guru John Chow got into a discussion about money and frugality, and why he chooses not to live beyond his means unlike so many of the other folks out there spend as much or more than they're raking in.
For those people he offers the best piece of financial advice that he ever received.
It’s Not What You Make, It’s What You Keep
It really doesn’t matter how much money you make. What matter is how much you get to keep at the end of the day. There are tons of people who make a lot of money and spend every cent they make and more. They drive all the fancy cars, go to the fancy clubs and live a “millionaire’s lifestyle”, only they’re not millionaires. In Miami, they’re known as $30,000 millionaires. They make $30K a year but live like they make a million.
Thanks to low-cost leasing and zero down financing, anyone with even a modest income can project the image of a millionaire. The only problem is, the debt will eventually catch up to them and that’s when it’ll all come crashing down. This was what caused the US financial meltdown. Too many people were spending more than they make and leveraging their debts to the hilt.
In the comments of that same post Darren Rowse of problogger.net fame agrees with John completely.
One of the best things you’ve written John.
Financial stability has more to do with what you spend than what you earn.
I’ve had people over the years ask me why I don’t drive a better car, living in a better suburb, wear better brands etc too – but I guess ultimately for me it’s about living within my means – which for me means not only spending less than I earn but also about thinking about the future and using what we don’t spend in a way to produce income.
Of course you can take this principle to the extreme where you never spend any of your money on nice things and live like a scrooge – for me it’s about balancing things. We try to enjoy life by taking some good holidays, eating out in a nice place from time to time etc without going over the top.
Of course not everyone has the luxury of being able to earn enough to invest – but many people could certainly cut down spending.
To me it's encouraging to see these two blogging bigwigs talking about personal finance in such a responsible way. They are displaying the true attributes of those with a millionaire mindset, people who live like true millionaires, and not those who are pretenders.
Why encourage people to live a high-flying lifestyle when you know it isn't the way to true success?
What Do People With A Millionaire Mindset Look Like?
So what does a true millionaire look like? In his book The Millionaire Next Door Thomas J. Stanley takes a look at things that millionaires have in common.
“In the course of our investigations, we discovered seven common denominators among those who successfully build wealth..
Thomas J. Stanley
The Seven Factors
1. They live well below their means..
2. The allocate their time, energy, and money efficiently, in ways conducive to building wealth.
3. They believe that financial independence is more important than displaying high social status..
4. Their parents did not provide economic outpatient care..
5. Their adult children are economically self-sufficient..
6. The are proficient in targeting market opportunities..
7. They chose the right occupation..
John and Darren have the right idea in mind.
They're living well below their means, allocate their time efficiently (I'm sure they have to being as busy as they are), they don't really care about displaying social status, and they definitely chose the right occupation. And of course they're both extremely good at targeting market opportunities.
I feel like I'm on the path to do the same as well, and I feel like I know what it takes to truly succeed.
It all comes down to the execution, however, and I just hope I can continue doing well as these guys are.
Do you feel like living below your means is one of the best pieces of financial advice you could give someone? What advice would you give, and where do you think people should focus in order to be successful?
This is such a great post. From the first day of our marriage, we committed to living on one income. That meant living in what our Realtor optimistically described as an up and coming neighborhood and it meant driving older paid-off cars. It’s also what enabled us to take some great trips in those first few years, and it was the key to being able to afford to have my wife leave her job when we had our first child.
A long time ago, I remember a wealthy friend saying that the most important key to wise money management is living beneath your means. I thought for sure it was more complicated than that. But I’d say there’s a lot of wisdom in that simple sounding idea.
The sad thing is, even though the idea is simple, far too many people don’t live by it. Instead they pile on the debt under the false assumption that “you have to borrow to get ahead”, and in the end they get left far behind. So start living BELOW your means folks! It’s simple and it works!
I don’t think it gets much simpler than “spend less than you earn.” I think most people know they need to start saving, but don’t know where to start, or find it easier to instead say, “I’ll start next year” or “I’ll start saving my expected raise.”
I say make your savings automatic and you can splurge and spend with any amount that you have left after your automatic savings. You won’t feel like you’re missing out, nor will you feel like you’re living below your means because you’ll never really notice it coming out of your paycheck.
Some people think living below your means will somehow limit you. I find it liberating! It is all about the choices one makes. For me, it is a game to get the most value out of something. I don’t think I deny myself anything. My advice is think about priorities and shape your life to what is important to you. In my case a secure retirement is important, so I take that off the top and live on what is left..
Living within one’s means, and keeping a gap between income and expenses, is a foundational principle of personal finance. I wholeheartedly agree with the idea.
Ultimately, it sure is what you keep – and what you do with what you keep – that impacts your long-term financial prospects. Now, one also must make money in order to have anything to keep, so income generation/preservation/growth is huge – and gets lost in the shuffle sometimes.
Overall though, I think that it comes down to education and discipline. With these, it becomes clear as to why one must make money, then focus on keeping a large percentage of those earnings. Then, ultimately, maybe you won’t have to worry about the income generation – because your savings will be working for you!
I agree, the income side of the equation often gets left out as well. That’s why I’m a big proponent of diversifying income and coming up with multiple streams doing things like blogging!
It’s great advice, but I just wish my means had an extra zero or something added to it. :) Then I could limbo below my means all I wanted to.
Living below your means is obviously a key component to accumulating wealth. However, to accumulate quicker, always educate yourself and try to find new ways to make money. You can only cut costs so much, but your earning power is unlimited.
I love when I read examples of people that are living reasonable instead of flaunting their wealth.
I def agree with you here, it’s always great to see these heavy hitting bloggers speaking from real personal places. I love John Chow and Darren Rowse and it’s clear to anyone that follows them that they make a very healthy wage from blogging every year. But through their own practices they maintain comfortable lifestyles, probably save a ton, and get to do the things they love – no where is there anything about living like a rockstar in there. I really liked those 7 mindset points too and hope to get to execute the ones about having adult children some day when http://www.financiallydigital.com really takes off ;p