Spending less than you earn can be accomplished by earning more, spending less, or both. Yet most people in the personal finance world tend to support one strategy over the other with greater fervor. It's not a logic thing: it's a personality issue that may have to do with risk tolerance, optimism, entrepreneurship, class background, religious outlook, cultural practices, and other unknown factors.
Sometimes this can be situational. When work doesn't deliver one might focus more on cost-cutting. When the economy grows, we might try to increase our profits and incur lifestyle inflation. Some personalities will do the reverse, however: look for opportunities in bad times, save for a rainy day in good times. We're all different, and that's a good thing.
Personal finance advice varies the same way. On one end you're told you should be a “winner” and amass millions. On the other end you're guilted into joining the frugal/minimalist movement so you can retire early, reduce your environmental footprint, and travel the tropics for a dollar a day.
In this article, I'll examine these opposing viewpoints as they apply to real-life situations (mine in the article, yours in the comments). This first installment is about housing.
Round 1: Housing
Starting from balance
The Nerdez family spends 26% of their take-home pay in housing, including renter's insurance and basic utilities. In total, we spend less than we earn. Our money (actually I should say “our cash flow”) is “in balance,” per the Balanced Money Formula: 50% covers our needs and contracts, 30% is for our wants (fun stuff, like restaurants or new clothes,) and 20% goes to savings and debt repayment. We have a small emergency fund, and we even have a little debt snowball that's rolling at a manageable pace.
After years of severe austerity, this feels good and right and safe.
Three years ago we were forced to cut deep. We had been living beyond our means since leaving grad school. The recession nuked our biggest clients and our over-leveraged financial construct crashed as a result. We retreated to safe ground in a hurry while letters from creditors poured into our mailbox. We had to cut costs, find ways to earn again, or declare bankruptcy. With a shrinking economy and a negative cash flow, making more money became a tremendous challenge. And so we cut costs–with a meat cleaver.
We moved from a three-bedroom house to a one-bedroom apartment with no washer and dryer. We got rid of three bedrooms worth of “stuff,” including excess clothes, which we sold for cash. We traded a high-maintenance import car for an American truck. We spent on nothing that wasn't vital for survival, and if we did then it was probably just twice, and it cost 50 cents.
Today we enjoy living below our means. It's a huge source of serenity. Only there's a problem with this model, and it has to do with our means: they are still very limited.
Living like students
Right now our balanced budget allows us to rent a one-bedroom apartment in a mixed-income neighborhood of a mid-sized city in the Southwest. It's convenient, close to many services, walkable, and quite trendy to boot (for the town, anyway). In spite of all of these advantages, rent is very low. That's because we live in an apartment that's usually rented to students.
This is the cheapest rent we've ever paid as a couple, but the place is decent and well maintained. The landlords are friendly and responsible, not predatory slumlords, and in this we're very lucky. Our immediate neighbors are nice people, mostly in grad school or recently graduated. However, this isn't the best location for people over thirty.
The area is fun and lively, but it can get rowdy on a Friday night when the drunks walk home from the bars, singing and howling. On regular days the students aren't the best at picking up after their dogs (they all have dogs for some reason) and I take the abandoned feces as a personal affront.
We also have a population of homeless drunks who have no qualms about accosting you at your doorstep to ask for a cigarette (I don't have one), or tell you they need bus fare (it's not true). One late night, some time ago, a mentally ill man had a lively party with his invisible friend in my front yard. They left commemorative cigarette butts and beer cans.
We've lived in bigger and louder and crazier cities, but we had better windows that kept the noise out, and our buildings had porters and security guards. Paying 60% of our income in rent was crazy, but it had some pluses…
Right now I'm thinking we could just stay in the area and rent in a better building. Something, you know, for grownups.
Space. The final frontier. Not outer space, but figuring where to fit a kitchen table when there's no more room (answer: nowhere). I've seen video footage of the space shuttle astronauts, and they lived in orbit almost as cramped as we do here on Earth.
My wife and I both work at home. Until recently she had a part-time job she hated, and she would spend two or three days a week there. She recently quit, so she's here full-time now, with her plants and posters and trinkets. She likes a homey space, I like mine industrial-looking.
Both our living room and dining area function as offices and studios. We also rent a small storage space: not for clutter and “collectibles”, but for actual business gear. The storage makes our space more livable, but we still lack areas to relax and socialize. Having friends over can be difficult, but since we stopped spending money going out, we have little choice and we invite them over anyway–two at a time.
All along we have thought of our small-space living as practice for some day when we'll be in New York, or Tokyo, or who knows where else, but we've been feeling cramped lately. Creatively, frugally, minimally, apartment-therapy cramped. Tiny houses can be a giant pain sometimes.
Is it really necessary?
We could find a studio or office space outside our home to free up our living room, and that would make things more flexible, but it would cost more money. And since ours is a “passion” line of work, we do it at all hours of day and night. When you're up at 3am editing video, or writing, or painting, it helps to be near your own kitchen and bedroom, not in a deserted building under green fluorescent lights. Our situation simply calls for bigger housing. Or doesn't it?
Next year we're going to be in an artist residency (free housing and free studio space for a few months). After that is over we'd like to move to a more spacious and safer home. But we could also sublet our place so we come back to it, and continue saving money. Both options have their pros and cons.
Yes, people are poorer and more cramped in the third world, but we don't live there, and we're just two human beings with earthly desires. We can argue until we ‘re blue in the face about what is a “need”, but fortunately in our society no citizen's committee can tell you that you have to be content with your housing allocation. It's a free country. And right now, we're feeling restless.
Our next goal: earn more
Should we focus more on earning so that we can move to a bigger place, or just be happy with what we have?
We would like to move, and we'll work on earning more with this goal in mind until it happens or something changes our minds. Are we asking for “lifestyle inflation,” dear readers? Or are we being reasonable? Counter-cultural frugalistas will see us as hungry capitalist pigs, but more advanced capitalist pigs will laugh at the squalor of our daily life. No matter what you do, you can't please everyone.
And so, to improve our lives while staying in balance, we will make more money and add to our savings before we move to our next place.
A future installment in this series will deal with the non-trivial challenge of increasing your income when you just can't go back to being sixteen and making all the right decisions this time around.
And for you…
- What percentage of your income do you spend in housing? How much do you think is right?
- How does the space and layout of your home reflect your priorities? In what ways does it fail to do so?
- How have your priorities for your home changed over time? How have you dealt with those changes? Did you move, remodel, rent external space, etc.?
- How do you balance savings and debt repayment with other goals in your life?
Round 2: It Takes Money to Make Money
Last week I spent a thousand bucks on a phone. I paid full price for it, in cash, no contract. It's not the phone I originally intended to buy though. I had first picked a little HTC phone that was cheap and had an old version of Android in it, and it was on sale for $180. A modest, frugal smartphone.The HTC was very nice and it was supposed to do the trick, but Android won't work my calendars the way I need to (like my iPod touch which I use as an organizer), Evernote (which I use for GTD) asked for a new micro SD card, Spotify would just freeze there without launching, and my bluetooth headset had connection problems. The day I bought it I was up till 3 am setting it up, and still no cigar.
So I decided to go crazy and fix this once and for all. And yes I felt guilty and apprehensive about it, but I did it in spite of my stupid feelings because I needed a definitive solution to my communication problem, and I knew I'd find a solution at the end of the bleeding process, or else the solution didn't exist.
So the next day I broke down and went back to my neighborhood Radio Shack and exchanged the little toy for the $650 iPhone. At the register I bought 2-year Apple Care for another hundo (“$99,” they call it, but come on!) The next day I got a LifeProof case for $80 so that it never gets wet (I know Apple is picky about servicing phones that have been exposed to foggy bathrooms, and we're in monsoon season here). And $18 for a car charger. That's $847.
Originally I also picked a plan with 300 minutes of voice and unlimited data for $35/month, but with auto-pay it would go down to $30. A week later I had burned down the minutes, so last night I had to upgrade to a plan with unlimited voice that's $50/month. That's $85 in one week.
Add 7% sales tax to everything I listed above.
Yes, I can hear the sound of hairs being raised on the back of your necks when you read how I just spent $997.24 in a phone that will continue to suction $53.50 off my budget every month for the foreseeable future. I can also see the pointed fingers, and hear the cries of “spendthrift!” and “lifestyle inflation!” in front of the jury as the prosecution demands I get burned alive for crimes against frugality.
And yet, I think I made out pretty good with this deal.
See, until last week I was a 20th-century primitive who never had a proper cell phone. I bought a Nokia years ago, but it was a burner I'd recharge only sporadically, for emergencies. I was always counting my 10-cent minutes, and trying not to talk much on it– so it wasn't a proper phone, like the ones you can just pick up and dial without thinking about the hold time for a customer service representative.
Meanwhile, I'd been using Google Voice and Skype to conduct business. It's all great and you can talk free of charge from your computer; but if your internet fluctuates (like when you upload big files for a client) your calls falter or fail, and the interpersonal dynamic suffers. Same thing if your computer for some reason (gasp!) crashes.
Before this I used more traditional internet phones, but they all suffered similar connectivity problems, so I figured why pay for a line when I can get the same iffy service for free on the web.
Only problem is now I had to stand in front of the computer to talk, or have a laptop on at all times to carry around while I spoke; so I'd sit down to work with two computers: one to do all the heavy lifting, the other running as a phone. But then the laptop broke, so I had to talk from the workstation, which means I was tethered to it like of those ancient phone booths people used to beat when they were angry with the operator.
So I got a bluetooth headset to pair with the computer. This allowed a measure of mobility, except that the thing would run out of battery in the middle of a call and I had to jack it to the power and sit there yanked by the ear, trying to discuss business. And I couldn't use the headset while editing video, because the video software can't relate to it as an audio interface.
So now that I started making money again I decided (deliberately, frugally, consciously), to get me a good deal on a modest phone with a limited no-contract plan.
Except that I already told you the story of the little cell phone that couldn't.
And it was at 3am when I was still trying to get the thing to work the way I wanted that I said to myself (with an imaginary screaming voice) ENOUGH OF JURY-RIGGED SOLUTIONS AND PINCHING PENNIES AND LOSING SLEEP. I HAVE BIGGER FISH TO FRY AND I AM THROWING MONEY AT THIS AND WILL NEVER SUFFER COMMUNICATION PROBLEMS AGAIN! (That's an adaptation. In truth, I used a lot of unprintable words.)
In the name of frugality I had already been throwing money at the problem, bit by bit, without ever solving it. Burner phones that I couldn't freely use. Pricier internet to ensure good bandwidth for free internet calls (how free is that really?) which kept me trapped indoors. Extra laptop always on the side, to make sure I could talk while doing other work (that's an expensive and clunky phone if you think about it). Bluetooth headsets (and other nonsense) to add yet another point of failure. A non-phone organizer also tethered to wi-fi. A new budget smartphone that wasn't too smart.
The reason I burned through all three hundred minutes of talk on the first week is that I was busy with business calls– conference calls, calls to distribution, calls to clients, calls to crew, without end, working 14-to-16 hour days. These long days were enabled by the so-called “luxury” phone–the one that sounds clear and does my calendars right and beeps me with reminders at all times and runs my music when I'm stressed and keeps me organized and takes great photographs and *just works*.
And because it just works, and I could focus on other things and not on “making the thing that talks to people work” I got rid of a lot of non-productive busywork, I was able to keep track of my notes and to-dos and appointments anywhere, I was able to talk uninterrupted wherever I went, which meant more productivity, and I was able to make deals that can pay for the phone five times over in the space of just one week–this in addition of the regular work I already had lined up. A week! Basically, 1 day of work = 1 fully loaded phone. And right now I'm writing from the road while working on those contracts.
If I am to lose sleep over money, let it be over making thousands and not trying to save pennies.
Round 3: ‘The Queen of Versailles'
Earning and saving money both take time, effort, knowledge, attention, and continuous dedication. Since we know that willpower is limited, and so are energy and time, it can make sense for a lot of people to put a keener focus on making more money, which has a greater potential than saving.
However, potential is never a guarantee of earnings, and high debt and spending can destroy even the largest of incomes, so it's crucial not to overextend. The fascinating documentary “The Queen of Versailles,” which I watched recently at the movies, illustrates this subject beautifully.
The trailer will probably give you an impression that this is something like a special extended episode of “The Real Housewives of Orlando” on Bravo, and in some sense that is true (Bravo has bought the rights to the film). And of course the audiences are tempted to judge and point fingers at the excess. However, there is much more to it than a reality show, and I believe this film is a rich cultural artifact for those interested in the study of money and psychology.
David Siegel is a real estate mogul, Jackie Siegel is a former beauty queen; they have eight children and more money than they know what to do with. At the start of the movie David claims that he is directly responsible for getting George W. Bush elected in Florida in 2000, but he can't tell us how he did it because “it's probably illegal.” He's also crazy about the Miss America pageant and loves to host the contestants and flirt with the girls. Jackie, a former Mrs. Florida, goes from one fundraiser to another wearing skin-tight clothes and a collection of shoes that includes a pair of $17,000 boots, while an army of nannies and housekeepers look after her life.
At the height of the real estate bubble, Siegel's company is selling $1 billion a year worth of timeshares to people who can't afford them, and Jackie and David are building a 90,000-square-foot mansion. Then the economy crashes, and it's not just their business that suffers: they risk losing it all because everything they own has a mortgage on it. Their creditors take control, put David on a salary, and the Siegels have to learn to live on a budget like everybody else (not really like everybody else, but you get the idea: they now have limits like us mortals). As the bubble bursts, their lives fall into disarray.
“The Queen of Versailles” won one of the Best Documentary awards at Sundance, but probably not just based on the main plot, even if that plot is similar in trajectory (though not in scale) to the lives of millions of people before and after the onset of the Great Recession. Yes, the scale of the Siegels' lives is gargantuan, and that gets quick attention, but I believe the real strength of the film is the careful examination of its characters, and the way it depicts their humanity amid the surreal settings.
And this is where the documentary gets really good: the words that come out of people's mouths in front of the camera are profoundly revealing and deserving of attention. While the title and trailer hint at Jackie as the main character, I found David to be the more fascinating subject, because he is the one who knows money and how to make it, whereas Jackie appears clueless about finances (though we later find out she's quite smart).
Here a few quotes I managed to jot down in the darkness of the movie theater:
“If they can't be rich, the next best thing is to feel rich— if they don't want to feel rich they are probably dead.” David Siegel on selling timeshares to those who can't really afford them.
“If you're using money to make money, why have an asset that doesn't have a mortgage on it?” David Siegel on why he is broke in spite of his enormous earnings.
“Work is my life 24/7,” and “Nothing makes me happy these days. I can't separate business from personal.” David Siegel when battling for the survival of his empire, while becoming emotionally unavailable to his family.
Every character is supremely interesting to watch: Jackie, who got a degree in Computer Engineering but fled that field to become a model because, she says, the people she worked with hated their jobs. Her children, who learn that now that they lost everything “they'll probably have to go to college and get jobs.” Their Filipina nanny, who hasn't seen her own children grow up and is obsessed with building a concrete house for her aging father. Jackie's chauffeur, who also lost everything in real estate and borrows his employers' Rolls-Royce to rent for weddings. Their adopted teenager, who was rescued from an abusive household and is able to observe things with greater clarity than the adults around her. The estranged son, who grew up poor while his father got rich and relates to him now as an employee relates to a boss. The thousands of people who tour the company's properties with mouths agape and buy timeshares on credit.
And the theme that pervades each character's story is is how we relate to money. Money is the biggest star of this film.
In spite of the misinformation you'll get from the Internet echo chamber, let me state clearly that the eponymous house is NOT a replica of the real Versailles. The Siegels aren't interested in history or what happened to the former occupants of that palace. While a visit to France inspired them to build their own McMansion on steroids, the architecture was actually copied from a Vegas casino.
And Las Vegas shapes the very core of this drama. The bleeding heart of Siegel's empire and the cause of his financial troubles was a tower in Vegas with $400 million in unpaid bills. We also find out that David's parents never had any money because they lost everything in Vegas, a place where they were made to feel rich even though they were nobodies (just like his timeshare customers). And while David is a genius at making money, and shows an admirable tenacity in the face of adversity, he also comes across as a gambler who overextended himself by betting everything on winning perpetually… just like so many of us would in similar circumstances, because we already did in our own little ways.
As of the writing of this review, David Siegel's fortune seems to be on the rise again, and while I wouldn't dare guess what's going on with his family, I do wish them the best.
The need to specialize
I have been wrestling now for some time with the question of where to focus one's energies: whether to earn more or whether to save more. Of course you want to do both, but to get really good at something it takes time, effort, patience and dedication — just like anything you want to be good at: pitcher or catcher; quarterback or wide receiver; striker or goalkeeper. Success loves a specialist, and every now and then a monster is born who can do it all. The rest of us mortals are best at keeping focused on one good thing and automate or outsource the rest.
The road ahead
As I move forward in my journey to earn more, I pledge financial prudence. Never again will I overextend myself without a reasonable reserve. However, my main focus will be on making more money, and my future articles will reflect that approach.
For that reason, I officially give up on making my own detergent, growing my own vegetables, looking for usable items among street refuse, returning gifts to buy them cheaper elsewhere, or spending hours clipping coupons. I will buy my bagels instead of baking them.
Please understand this isn't a criticism of money-saving activities. I understand they are desirable for some people for a variety of reasons, all of them valid. And they may even be mandatory instead of optional in some cases (we were briefly on food stamps a couple of years ago, and I became the master of the flour sack).
Furthermore, earning and saving don't have to be mutually exclusive: in some families, one partner may specialize in earning, and the other may specialize in managing the money to maximize its value. And there you have it, the best of both worlds. But in my family, the way things are, it's best for both of us to focus more on earning at this point.
In any case, if everyone were the same the world would be a boring place, and if every blog post would tell you the same thing, you'd want to pull out your eyes. So here I am being a bit of a contrarian to my colleagues if you'll permit. I'll be here just to say, “Make more money!”
Eating my words (just a little)
Yes, once upon a time I wrote a post recommending that people cook at home, and I stand behind that notion not just for the savings but also because it gives me great pleasure. However, I also know that sometimes it pays to get carryout, or at least assemble a meal from readymade ingredients while we focus our energy doing more important work. (I keep jars of artichokes, cans of salmon, boxes of soup and packs of water crackers for meals in a hurry.)
For some people, going on business lunches or dinners can be an opportunity for economic growth. Maybe you're a salesperson or a CEO. If going to restaurants can help make you rich, hey, I may be a little jealous of your situation, but I won't resent you. Go for it, and please enjoy.
What makes my choice possible
Here is why I am able to focus on earning more: I don't hate my job. Yes. I do not hate my job. There.
I love work in general because it creates all the good things that we enjoy in social life, but I also love my job in particular. I run a very small family business that allows me to be close to the most important people in my life. We work hard every day to create a business that embodies our values and reflects who we are. We perform creative work that some would consider “passion” work, and I suppose it is.
I love new challenges, and I love to develop my skills. I love charting the unknown and I love also that I'm learning to build a successful team. I love it when a client says they are happy with our work, or when something we've made elicits a strong emotional reaction in an audience. I love it when our clients take our creative input and make it a part of something bigger.
I'm not a professional PF blogger, by the way. I have a service business and I'm committed to growing it and to being successful with it.
I want to work until I croak
Basically, my work is my life, and I'm very happy with that. The idea of early retirement is repugnant to me. I grew up surrounded by people of leisure, and I can attest to this fact: excessive idleness causes harm, and breeds degenerates. I have seen it with my own eyes. At some point in my life I even aspired to be one of those degenerates (don't ask). As I've grown older and perhaps wiser, and learned the value of character in a person's life, let me just say, I no longer aspire to be idle. I know this may sound corny to cynical ears, but I aspire to be a good solid citizen.
Another thing I'll add: as an existentialist of sorts, I find that work gives meaning to my life in an otherwise absurd universe. To give up on work is to give up on meaning, and to give up on meaning is to succumb to madness and despair. I want to be able to work until the day I die, if life permits.
A committed life is beyond money
All I want to do is be good at what I do, get paid well for it, raise a family, take care of my parents in their old age, and make a contribution to society. I have no dreams of being a special snowflake, and I don't want to be the greatest boy wonder in the world. In my teens I wanted to win not just one but two Nobel prizes! But as my soul moved out of Neverland and settled on Earth, I gave up grandiosity. Now I can just focus on being good at my chosen profession.
I'm in a committed relationship and I have no desire to ever date again. I have immigrated to a safe and prosperous country and I really don't want to hop from one third-world country to another with a ratty backpack. (I did that already between the ages of 19 and 28– moreover, I grew up in a third world country.) I am committed to maturing as a person and I don't want to have a second adolescence and repeat myself like a broken record. I want the very life I have.
To paraphrase Michelle Shocked: When I grow up, I want to be an old man. And if I can learn to earn more during my aging process, I'm going to do it.
Author: El Nerdo
Maximiliano â€œEl Nerdoâ€ NÃ©rdez has been, at various times, scientist, dishwasher, professor, circus performer, politician, farmer, door-to-door canvasser, and fugitive from justice. He made a living as a freelance artist and small business owner. He is interested in the philosophy and psychology of financial prosperity because (he claims) “itâ€™s all in the mind.” El Nerdo does *not* live in Portland (OR or ME), and he remains incognito in order to protect the innocent.