What does the rich life mean to you?
Imagine one person—let’s call her Bonnie—who earns $80,000 per year (including benefits) at a job that requires 40 hours per week. Bonnie commutes in rush hour traffic for 3 out of 5 days each week, and works at home the other two days.
Imagine another person—let’s call him Charlie—who earns $40,000 per year, but in a job that averages only 20 hours per week. Charlie works a variety of jobs close to home, usually without the hustle of rush hour.
Bonnie and Charlie earn roughly the same amount per hour, but which of these two people lives the richer life?
The beauty of this question is that it largely depends on whom you ask. If to you the rich life means finally having that five-bedroom penthouse in the city or that luxury automobile to drive into the sunset, then you probably wouldn’t have chosen music as your career. And you certainly wouldn’t be reading an article that urges you to live below your means.
Perhaps you are considering cutting back on your work hours so that you can spend more time with your friends and family. Or maybe you need to work less so that you’ll have the time to take better care of yourself. But even if you’re not looking to make this kind of change, we could all use a little more “wiggle room” in the budget, which allows us to focus on the opportunities that enrich our lives and ignore those that don’t.
This article compiles some lessons learned in one frugal Midwesterner’s journey of fiscal efficiency. I present these lessons here so that all those who wish for the rich life might find it.
Why you should care about this
Lowering the percentage of your income that goes out the door every month in bills of course means more left over for later. You can build a savings that way. This is simple enough to understand, and definitely not a sexy thing to write about.
But here is what excites me. If you can maximize your income from the work you already do and keep your expenses in check, you’ll position yourself to take the risks you need to take.
If you do freelance work, you’ll find that it’s easier to experiment with raising your prices when you can afford to let go of a gig here and there.
A healthy savings account allows you to leave a job when it’s time to leave it. If things turn toxic, you can leave before the damage becomes permanent.
With all this in mind, I’ve had quite a bit of practice learning how to earn more and spend less, all without compromising my quality of life. The three main paths that have helped me the most are straightforward, but not always easy to execute: earn more, spend less, and save for later. Here are some of the ways I’ve improved my situation in all three categories.
Increase Income: Don’t leave money on the table
If you’ve read this far, I’m assuming that your work isn’t merely about money. However, no one deserves to be undervalued or underpaid. The rich life is much easier to find if your income is what it should be in the first place. Are you paid as much as possible for the work you already do? Follow these few basic steps to find out.
Know the normative rates for your work.
If you haven’t recently done so, take a look at what similar jobs are paying in your area. You can always review job postings, but keep in mind that some of them will misrepresent what they actually pay. Trusted colleagues are often the best source for comparative data on salaries or fees. Try posing the question to them in terms of prior experience rather than current income levels. “What are you accustomed to being paid for service x, y, or z?” makes for much smoother conversation than “How much money do you make?” Sometimes, it really is about how you say it.
Renegotiate salaries and fees.
There are of course many good reasons to work for a below-market rate from time to time. But don’t make it a habit. Far too many of us avoid asking for more money because we fear that our prospective employer or client will retract their offer. I can tell you from experience that this rarely happens. Negotiating the fees for countless freelance gigs (as well as several “normal” jobs) has taught me that the vast majority of people are willing to work with you on any reasonable request. Those who are not willing to work with you probably aren’t worth your time anyway.
For more detail on negotiation techniques, you might enjoy my article Fair Compensation in the Church.
Consider a “day job” or freelance work.
If you’re having trouble making ends meet, and you’re certain that you’re already paid as well as possible for the work you already do, sometimes the best recourse is to find additional sources of income. There is no shame in working several part-time jobs if that is what allows you to serve the world through your talents.
Be sure to also consider freelance work. I’ve been fortunate to find several local contacts who are happy to help connect me with new freelance jobs. As a pianist, I spend quite a bit of time accompanying choral rehearsals, private lessons, recitals, and various social events. Some of these pay quite well, while others do not. It all evens out to a nice boost in my income.
If you’d like the full scoop on my experiences as a freelancer, check out Lessons from a Year of Freelance Work.
Reduce Expenses: Don’t overspend on the big stuff
We’re often told that drinking one less cup of coffee each week can yield us untold sums of money. That may be true, but I think it’s better to focus on the bills you must pay every single month and start there. Trying to save money by staying away from the lattes is like trying to lose weight by never eating dessert. It helps, but you’re missing the point. It also makes life woefully unpleasant to eliminate too many of the things you enjoy. The rich life allows room for the occasional indulgence.
Some of the must-pay items are truly essential things (house, car, and electricity) with optional components. For example, everyone needs a place to sleep, but no one truly needs many of the amenities often found in a modern house or apartment. Let’s break it down into categories.
Rent or own?
The rich life is NOT about owning your own home.
You do NOT need to own your house to be financially secure. Folks in my parents’ generation are constantly disparaging others for “throwing away” money on rent. Their argument is that the money could be better spend building equity on a house and getting a huge tax writeoff for the mortgage interest.
This is total baloney. If your lifestyle and income are conducive to buying a house, and you really want to be a homeowner, then buy a house. Otherwise, rent. Numerous people rent housing their entire lives and go on to enjoy a comfortable and secure retirement.
I can’t resist pointing out that you won’t build much equity if you sell the house in a few years. By that point, however, you will have “thrown away” thousands in interest, taxes, and transaction costs. Don’t listen to anyone who tells you you’re a fool for renting. They are probably trying to justify their own (expensive) choices.
A (bad) formula for housing costs
As I write this in September 2018, the housing market is booming, probably in part because of a robust job market. Lots of folks are moving around for new opportunities, which is great. Unfortunately, this also means that it’s harder to find an affordable place to live.
There is no perfect formula for determining how much you can affordably spend on housing. Many financial advisors recommend capping rent (or mortgage) payments at 25% of take-home income. This is a great rule to follow until you move to an area with truly unaffordable housing. In that case, you need to find a way to spend less on other areas of your budget—transportation, or shopping, or high-end grocery items, for example.
One thing’s for certain, which is that most people spend more on housing than they should. By this, I mean that their housing expenses threaten not only their long-term security (retirement) but their overall quality of life. Overspending on housing forces you to under-spend on many things that really do improve the quality of your life. Wouldn’t you like to enjoy a meal out with your friends every week or two and save money for later?
Making it affordable
I understand that housing affordability is a large-scale problem—but so is consumerism. Don’t measure your own standards of living against friends and family who chose higher-paying careers.
Find a roommate (or two) to share in the cost of housing. Finding a compatible and responsible roommate is not easy, but it is well worth the effort. You’ll have hundreds more to spend on things that matter to you more than being able to cook breakfast naked.
If you rent, go for private-party rentals. Apartment complexes generally charge more (sometimes hundreds more per month) because they include a number of amenities. They also tend to be maintained to a higher standard. Sure, amenities and maintenance are important, but it’s not worth compromising your future just so you can have a garage and a pool and a dog park. Old, shabby private rentals can be perfectly fine places to live. When the price is right, you might be surprised to find how little you mind the small inconveniences.
For most people reading this in North America, this category will mean car expenses. What a can of worms! Sometimes I wonder if the whole system is designed to get us into new, expensive cars as often as possible. Six-year loans for cars? Are you kidding me?
I see two good options for reducing your monthly car expenses: buy the car outright, or get the best car you can afford on a 36-month loan. Getting that six-year loan I mentioned above is not smart. It raises the odds that you’ll owe more money on the car than it can be sold for. That’s a major problem if you decide to sell it, or (heaven forbid) you wreck it.
One good path is to buy the car outright in a lump sum. If you have the cash, consider buying the best car you can afford out of pocket. You can find a surprisingly reliable used car for about 5,000 USD. But almost anything is a good deal at the right price. Even $1,000 might get you a car with tens of thousands of miles to go. If you’re not into shopping for cars, ask for help from someone who is.
The flipside, of course, is that whatever lump sum you forfeit is no longer in your savings account. You’ll have that much less to cover future expenses, but of course those expenses will be lower without a car payment.
The traditional 36-month auto loan is still a good option, but with interest rates rising, it’s becoming less attractive. If you’re buying from a dealer, you might have trouble finding a car with an affordable payment. For example, I shopped for a used car through CarMax and discovered that they wouldn’t offer financing for cars under about $12,000. But they don’t have much inventory below that price anyway.
If you’re buying from a private seller, it can be hard to find lenders willing to front the money. Try local credit unions or online services like Capital One Blank Check auto loans. Keep in mind that most lenders have a minimum amount they’ll lend. (They won’t make enough money to justify the trouble of issuing small loans.)
If you can’t afford the monthly payment on a 36-month auto loan, then you can’t afford the car.
Utilities and Services
My hope is that by reducing housing and transportation costs, you’ll have enough left over that utility costs aren’t a problem. But just in case, here are a few of the worst offenders.
Heating and Air Conditioning
In cold northern climates, heating will always be a major expense. Set the thermostat as low as you can bear, perhaps 65 degrees Fahrenheit, during heating season. Wear layered clothing around the house. You can also supplement with an electric space heater as needed, though of course this uses a lot of energy as well.
In the summer, use as little air conditioning as you can bear. It is also one of the worst offenders. Run the air conditioning just enough to dehumidify the air.
Cable TV, Internet, and Phone
If you have cable TV at all, consider nixing it altogether. The cable companies face enormous fixed costs. This means that they have to charge their shrinking list of subscribers more and more all the time.
I’ve had good luck negotiating internet service bills, even in an uncompetitive market. For example, when I was living in Rochester, NY, Time Warner was the only game in town for high-speed internet. They knew I had no other choice. But they still offered me discounts when I asked. I think it was because they would rather keep me as a customer than lose my money altogether.
If you haven’t shopped around for phone service in a while, you’re probably paying more than you need to. Companies frequently change their pricing tiers, and there’s a good chance that another company can serve your needs for less money. I’m a big fan of Consumer Cellular [not an affiliate link], which follows a tiered pricing model similar to prepaid services. I have access to all the voice minutes and data I could ever want, usually for about $30 per month.
There’s not much I can do help you spend less on fast food, coffee shops, and avocado toast. However, you can probably reduce your spending on these things by half and enjoy them more than you did before.
For a cheap meal on the go, try out this Simple Soba Noodles recipe I devised for the days when I “gig” around town and don’t have much time to eat a meal. Each portion can be consumed in just 10-15 minutes.
It’s part of my personality that I not only keep a monthly budget, but that I enjoy doing so. Budgeting isn’t sexy, but it will help you see how many dollars you burn through. If you hate tracking your expenses, try doing it in batches once or twice a month. Tools like Mint and Every Dollar make this easy. [These are not affiliate links.] See you how did in the past several weeks, and make adjustments going forward.
Build Your Future: Save for later
Cash is King
Once you’ve generated a surplus by spending less than you earn, your first order of business should be to build up your cash reserves. Some people call this an emergency fund, but I think that’s an alarmist term. I prefer to think of it as a contingency fund. Sometimes you’ll draw on these reserves for reasons that are somewhat predictable—moving out of state for a new job, for example.
Professional advisors typically recommend keeping three to six months’ expenses on hand in cash. This is sufficient for most people who have a steady paycheck that covers their essential expenses. If you depend on freelance work, seasonal employment, or other less steady sources of income, I suggest keeping up to twelve months’ expenses on hand in cash. This will take a long time to accrue unless you’re living far below your means.
But it is totally worth the effort of building a healthy savings. One of the greatest payoffs is the peace of mind that comes from knowing that if you lose (or leave) your job tomorrow, you’ll be OK. This allows you more room to take the creative, calculated risks that a great career sometimes requires.
You Will Retire Someday
I’ve heard colleagues say that they don’t ever want to retire because they love their work. This is a great thing to see. Unfortunately, many of them also believe that because of this, they don’t need to save money for retirement.
This viewpoint is dangerously short-sighted. Wanting to retire is one thing; having to retire is another. The facts are simple: many people retire earlier than they planned due to health problems, job loss, or the need to care for a family member. What do they do without sufficient savings? They rely on public assistance, which limits their choices.
You can live in a house while paying for it. You can pay for an education while you work. You can pay for a car while driving it. But you can’t pay for your retirement while your retired. Retirement must be pre-funded.
What to do about it (for readers in the United States)
Assuming your cash reserves are fully funded, see if you have access to a retirement plan at work. This is the best place to start for most people who won’t need the money until retirement. The contribution limits are generous, and you get a tax writeoff for every dollar you contribute.
The main drawback of employer-sponsored plans, usually a 401(k) or 403 (b) for workers in the United States, is that they require you to forfeit access to your contributions. You can’t withdraw your contributions or the earnings on those contributions without penalty until retirement.
If you’re like me and your margins are tight—meaning you don’t have a huge surplus to save for later—save into a Roth IRA. Leave your contributions in cash, that is, don’t invest them, until you’re certain you can part with the money. Under current law, you can withdraw your Roth IRA contributions at any time without penalty. (The same is only true of your earnings on the account under very specific circumstances, and there’s a lot of red tape to contend with.)
In other words, a Roth IRA allows you to build your cash reserves without losing the opportunity to contribute to a retirement plan. Keep the money in cash inside your Roth IRA account until your normal checking and savings accounts reach the amount you determined for an “emergency” fund. Then, you can finally invest your Roth contributions for the long run.
If you’re self-employed, even if it’s a small portion of your work, be sure to read IRS Publication 560, Retirement Plans for Small Business. This will help you understand your options.
Budgeting for the Future
If you can’t manage to put at least 15 percent of your income away for retirement, you need to cut your expenses. Move to a cheaper house or apartment. Find a roommate (or two). Treat your retirement savings as an expense, and put those savings in a separate account where they’re harder to spend by accident.
The Big Payoff
For all of the sexiness these ideas lack, I think you’ll find it worth the trouble to implement them. The rich life requires living below your means. (Forgive me, I’m from the Midwest!) Running a surplus while your “normal” colleagues spend themselves silly gives you a big advantage over them. Having a financial cushion makes it easier to challenge the status quo, which is an absolute requirement for effective leaders. With a healthy savings, you’ll be better equipped to lead and motivate others in accordance with what you feel is right, even if it sometimes means upsetting other people. So keep saving! It gets easier.