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.
I’m currently working on a series of articles where 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.
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?