You know the story. You have a job. Pay rent. Have a car. You didn’t have cash for the car so you got a car loan. Each week or month you commit a large chunk of money to maintaining a depreciating asset. You go shopping, eat out, live your life. You put your holiday on a credit card. Eventually, you have no credit available, the credit card is maxed and you start to panic. You are up shit creek. There is no paddle. This is living beyond your means. I’ve been there.
If you are like me the panic is accompanied by the painful awareness that you have no idea how to change your situation. You will start to read everything you can about money management. You will be terrified. There will be a period of intense disappointment when you realise how different things could have been. You cannot change the past, so you resolve to alter the future. You find a strong stick and slowly drag your way out of that quagmire of a creek, eyes cast towards your feet in shame.
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I know this story. This was me. Like many people who blog about money, I hit bottom before I learned how to manage finances. My husband and I have recently celebrated one year of travel. From New Zealand to the USA to Mexico and Europe. A Mediterranean cruise. Disney World. It’s been epic. And once upon a time, I was just like you. Let me tell you my secret.
I ignored my means.
I drew up a budget that accounted for everything we needed, regardless of how much we earned. I was aware of our income limitations of course, but they did not dictate how I budgeted. The figure changed slightly to account for increases in expenses as I went from living in a shared house with housemates to living in a one-bedroom apartment and then to living in my own house with my family.
You see, the problem with budgeting the other way round – by working out what you earn and then how to divvy it up to cover what you need/want – means you’ll never have a spare dollar. I promise you every gap will be filled. If you are a master budgeter you might plan savings as part of your budget but the reality is that most people don’t pay themselves first. They pay the bills and then what’s left has to cover everything else. There might be a little leftover for savings, but more than likely that little bit will go on crap you don’t need.
Our first year as parents was a financial shock to the system. We were used to earning two full-time incomes which allowed us to save over 50% of our combined income. I still believe living on one income is the number one way for couples to save – especially in the years leading up to starting a family. I’ll be writing more on that topic in an upcoming post (Update: I’ve written about living on one income here: Living on One Income: The Simple Path to Financial Freedom for Couples) but for now let me say that years of living on one income and pretending like the other didn’t exist is the whole reason I was able to ignore my means when drawing up my first family budget.
Define your Fixed Living Costs (FLC)
I’m not talking about just surviving here. This site is called Money Can Buy Me Happiness – not Having No Money Makes Me Hate My Life.
Your FLC should include everything you need to stay alive and ahead of your creditors and a small allowance that you can blow however you want. For example, the budget I drew up gave us a little fun money ($25 each per month) and covered all the big expenses (mortgage, insurance, groceries, electricity etc).
The most recent amount – pre-travel – that I could whittle my FLC down to was $2500 per month or $30,000 per year. That included mortgage payments, insurance, taxes, rates, electricity, internet, cable TV, groceries, daycare, all car related expenses, clothes, medical, fun money. Everything. On the first of every month $2500 was transferred from the mortgage offset account into the ‘Bills’ account and we lived as if $2500 was all we had. Every single wage or salary payment was made direct into our mortgage offset account.
Now depending on where you live $2500 may or may not be a lot of money. In New Zealand, it’s not a lot of money. Our house expenses accounted for just over half of that and we were very careful with the remainder. Our home is in a city with lots of wonderful parks and woodlands to explore for free so we made the most of low-cost activities. I also bought a second-hand espresso machine for $15 so I could make proper coffee at home. That single act saved us thousands.
Our income during this period varied from $3500 per month right up to $5000. As one of us was always a stay-at-home parent our ability to increase earnings was limited but the important thing is our expenses never varied. On a bad month we saved $1000 and on a good month it could be $2500. Without fail the savings account was growing. The only thing that varied was the speed of the growth.
Point of interest: The minimum wage in New Zealand is currently $14.75 per hour. A family with one full-time employee earning the minimum wage working 40 hours per week would take home $497 per week. If that family had one child (as we do) they would receive additional tax credits from the government of $152 per week bringing their total minimum take home income to $649 per week or around $2800 per month. Although I never planned my family budget around these figures it’s comforting to know we could still live well if we were ever forced to take a minimum wage job.
Living on a fixed amount each month is smart for lots of reasons.
- You always know what you’ve got available. The amount never changes. You will adapt and become an ace at keeping spending in that category within the right range. Living frugally becomes second nature.
- The temptation of lifestyle inflation is eliminated. All of your salary increases, tax refunds and other extras hit the bank account and have no impact on your spending. Your spending stays the same, whether you earn 50k or 100k.
- It’s easy to ascertain the amount you’ll need to retire early or travel the world for a year.
- If you ever need social assistance due to job loss you are already used to spending small. You will adapt faster than someone who has been living week to week.
- You will be filled with that warm fuzzy feeling that you are building wealth. It will help with the challenging times.
- Any extra money you make on top of your regular income goes directly towards things like debt repayment, building a savings buffer or travel fund.
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So What Does My Fixed Living Cost Life Look Like?
- One 23-year-old car – paid for with cash. It cost $1000 bought second-hand from a family member. The front electric windows are stuffed so we try to avoid driving in the heat of the day in summer. Other than that it’s a fabulous car and we will drive it into the ground.
- Cycling to work – when I was the primary earner I cycled to my office in the central city (an easy 12-minute ride, door-to-door) as often as possible. It helped us keep our fuel spend under $100 per month.
- Shopping around for the best deals. If that means scouring websites for the best deal then so be it. I also run everything I buy online through Ebates to see if cashback is available before I complete my purchase. If you’re interested in Ebates (and you should be – it’s getting back the money you were going to spend anyway) you can join for free. Use this link to join Ebates today and you’ll get $10 towards your first eligible purchase of $25 or more: What is Ebates? If you’d like to find out how to use Ebates you can read my in-depth Ebates review.
Related Post: How We’re Using Ebates to Save Big on Our Travel Bookings
- Haircuts and colours at the local hairdressing academy where a full head of highlights, a cut and blow dry costs $30. It takes over 3 hours but I save over $80 compared to a full salon service and the quality is the same as all trainees are overseen by a qualified tutor. That’s an after-tax hourly rate of over $26 for sitting down and reading magazines. Not a bad days work.
- A starter home. Currently, an earthquake damaged starter home. Three bedrooms, big garden. Close to the central city. Bought with a 90% mortgage in 2011.
Related post: Why Buying a Starter House (and staying in it forever) Is a Smart Move
- Hand-me-down clothes for my son and minimal clothing purchases for my husband and I.
- A weekly takeaway dinner of fish and chips. Sometimes Thai or Pizza. But 85% of meals cooked at home.
- A vegetable garden in the backyard which produced herbs, lemons, potatoes, lettuce, plums, courgettes (zucchini). Plus a weekly $10 subscription (now $12) to our local co-op for two large shopping bags of seasonal fruit and vegetables.
- Free activities – not hard in a city of beautiful parks with a toddler that likes to spend time looking at sticks, rocks and ants. Kids certainly help you appreciate the simple things in life.
- No health insurance. This is quite common in New Zealand. We currently receive free medical care and prescription medicine for all children under 6 (soon to be under 13). There were times when I took my son to the doctor twice per week just to be sure. General Practitioner visits for adults are around $40 per visit so we pay out-of-pocket. Prescription medicine is capped at $5 per item for adults. We probably spent around $150 on medical care for the year. I’ve spent more than that in the past month in Spain. After travelling the world and seeing what healthcare costs in other countries I am super-grateful to be a citizen of New Zealand. Our system is not perfect but it’s a lot better than most.
- Prepaid phones. We are travellers. Phone contracts are anathema to the mobile lifestyle. Enough said.
The Importance of Having Goals
Living this way has now become the norm. Being able to travel extensively with my family is worth every sacrifice. As I put together a plan to chase the summer around the world my budget will tighten and I’ll have to find ways to reduce my FLC even further. Without this huge, crazy dream I’m certain I wouldn’t be motivated to cut costs and keep such a close eye on things.
I firmly believe we are capable of anything we put our minds to. But we must put our minds to something. Whether it’s paying off debt, travelling, starting a family or raising a deposit for your first house – there must be a motivating factor. Frugality for frugality’s sake would be hard to maintain. The knowledge that I am living well within my means and the desire to achieve my goals gets me through the tough times. Endless summer, here I come.