Wealth is not how much material things you possess. Wealth means having what you need when you need it. Before considering wealth or even saving, consider your chosen life and lifestyle. First of three in a series.
Why do we work, earn, spend, save, and invest? Did we choose a particular lifestyle because of what we earn, or did we earn the amount needed to live a particular lifestyle we have already chosen?
A typical day (assuming 8 hours sleep) is 16 hours long. If you are working at a 40-hour-a-week job, you are spending 50% (more if you count preparation and transportation) of your weekday earning money, and spending almost 36% of all waking hours (it is not 50% because the weekends are still yours, for now). For those working a 50-hour week, that is just over 62% of your weekday and almost 45% of all waking hours. You have decided it is worth that percentage of your life in exchange for money and the resulting lifestyle it affords. Did you decide to live in a particular part of the city? Perhaps you have friends or family living there. Did you choose to live alone? Just those two lifestyle decisions have a cost, which in part determines how much you will need to earn. Either you decide to take a particular job to pay for the cost of those choices, or you adjust your lifestyle based on what you are already earning.
Either way you decide to approach it – in your work or in your lifestyle – these choices determine the quality of your life. In the short run, you have much more flexibility with lifestyle choices than you do over work. Over the long term, there are ways you can increase flexibility over work choices. The more flexibility you can obtain over these two variables, the more you can increase your quality of life.
Why do we save and invest? The spending you desire for lifestyle choices tends to be greater than the income currently received, at least to a point. We all have specific and individual motivations about money and spending. It is very personal. Some are motivations we learn, and some are acquired as we react to our peers. Money is personal, and that makes it a tough subject to discuss. It means so many different things: Security. Freedom. Survival. Success. So where do we begin?
Let us go back to the “chicken and the egg” riddle of whether we choose our lifestyle or whether our job chooses it for us. We will consider the basic costs of lifestyle, consider how much control you have over lifestyle choices, and how you might plan in the short term and longer term, based on what your goals are.
Consider someone just starting out on his own.
I was 18 and just out of high school. My brother and I decided to share an apartment. It was 1977 and the minimum wage was $2.30 an hour. I had found some apprentice-level construction work and I was elated that I was earning $4.00 an hour. Still, without having my brother split the rent of around $230, I could not have afforded to move out of the house and still afford to eat. Fortunately, I had a 1965 Chevy Impala to drive. Even then, I was not able to save much, given gas and upkeep. One particularly trashy girlfriend stole my life savings at the time. It was around $80, about six months of savings. OK, maybe some of it was from poker winnings. I forget. It was the 70s, after all. If we had added one more person to share our apartment lease, we could have rented a three bedroom for around $280. Just that one change would have generated $130 more in savings over the six months, not counting savings from splitting utilities three ways. By the way, that $130 plus the $80 in 1977 is just over $800 in 2015 dollars, not bad for six months, especially for someone making a minimal income.
The lifestyle choices we make determine our spending, and they really matter. The apartment or home you live in, how you travel, and what you spend on food, are the most important. According to the U.S Dept. of Labor Bureau of Labor Statistics (BLS) Consumer Expenditure Survey, the bottom 20% of earners spend 56% of income on food and shelter. Even the top 20% of earners spend 42% of income on food and shelter. Transportation is 16% for the bottom 20% and 17% for the top 20%.
Notice we have not really discussed savings yet. I will get into that in more detail in the next article. For now we can conclude that, whatever strategies you ultimately choose for saving money, it means you will make trade-offs in these three areas: food, shelter, and transportation.