In our consumption obsessed culture, few people have a sustainable standard of living, because they use credit to maximize their consumption and their living standards. They spend money before they have earned it. They have little or no savings and few investments. They substitute credit for savings when faced with an unexpected expense. When an interruption in income occurs, they scale back their consumption and liquidate their assets in order to pay their debts and everyday living expenses—a sure sign their standard of living is unsustainable. Even without an interruption in income, they are dependent on either periodic wage increases or additional credit to maintain their standard of living, because loan payments and inflation rob them of money with which to spend on consumption in the future. Any financial security they may think they have is an illusion: they are dependent on financial institutions for credit, employers for jobs and wage increases, and the government for unemployment benefits when there is an interruption in income.
If you are to enjoy financial security, you must establish a sustainable standard of living, one that reflects your true financial capacity, is backed by cash assets, and can withstand an interruption in income or a stagnant income.
These are the elements of a sustainable standard of living:
- Live on less than you earn. A sustainable standard of living requires cash and lots of it. The difference between what you make and what you spend is where the cash comes from. If you are a dual-earner couple, live on one income and save the second income. In addition to having money to save, living on less than you earn gives you flexibility to deal with financial challenges when they come along. Often you will find that the only adjustment you need to make to handle a financial challenge is to save less money for a while.
- Keep monthly contractual obligations to a minimum. Avoid contracts that obligate you to make monthly payments for a fixed period of time such as memberships and subscriptions. Contracts like these are similar to debt. Instead, pay as you go so you can discontinue a service at any time. This gives your finances maximum flexibility with which to live on less than you earn.
- Buy only what you need to get the job done. Once you get beyond the basic function a product is intended to perform, additional features provide less value relative to their cost. To maximize the value of the money you spend, buy only what you need to get the job done. For example, if a used vehicle will provide reliable transportation, the additional money spent to obtain a new car will realize very little additional value.
- Establish and maintain an emergency fund. An emergency fund is cash to replace wage income when it is interrupted by a job loss, medical leave, or a temporary layoff. Accumulate at least six months of living expenses in the emergency fund, keep it in a liquid account (passbook savings, money market account, or short term certificate of deposit) so you can get your hands on it when you need it, use it strictly for replacement of income and nothing else, and replenish the emergency fund as soon as possible whenever it has been depleted.
- Pay cash for everything except a house. If you can’t pay cash for an item or service, you cannot afford it. Earn your money before you spend it. Save in advance for purchases you know you will need to make with targeted savings accounts. Save and pay cash for a vehicle, furniture, appliances, clothing, vacations— everything.
- Accumulate capital for investment. Set aside money regularly for investment. Unlike targeted savings, this money is not for spending; it is used to build financial wealth. This is capital. Capital is invested and earns money. The earnings are added to the capital and earn money, as well. This money earning money has a compounding effect that produces an abundance of financial wealth over time. Eventually, this financial wealth becomes large enough to produce sufficient earnings to replace wage income.
A sustainable standard of living reflects financial reality; it is the true standard of living. Anything beyond it is an illusion created by the use of credit, an illusion that will one day collapse under the weight of the debt used to maintain it. A sustainable standard of living is available to anyone regardless of income provided they are willing to take control of their finances by setting financial goals and prioritizing their spending through the use of a budget.
K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based Lifestyle, Double-Dome Publications, 224 pages