The Elements of a Sustainable Standard of Living

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.
  • 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 LifestyleDouble-Dome Publications, 224 pages

Don’t Raid Your Retirement Savings to Spare Your Children Student Loans

Over half of the parents who participated in a recent T. Rowe Price survey indicated they would rather withdraw money from their retirement account, delay retirement for a few years, or work an additional job than have their children take out student loans to pay for college. If you are in that group, please reconsider because sacrificing retirement savings to spare your children student loans is a big mistake. Here’s why:

  • You cannot fund your retirement with borrowed money.  While your children have the option to borrow money to finance a college education, you don’t have that luxury when it comes to financing your retirement; you will need savings.  The vast majority of Americans have not saved enough for retirement.  You cannot afford to tap your retirement savings to pay for your children’s college education.
  • Your children will have forty years to pay back student loans and save for their retirement.  Your children have their entire lifetime to build their fortunes; you have less than twenty years to secure your retirement.
  • There are other ways to pay for college in addition to student loans and your retirement savings.  Funding the costs of a college education is not an either/or proposition:  student loans or your retirement savings.  Your children can pay for part or all of their own college education with scholarship money, wages from part-time employment during the school year and full-time employment during the summer,  by taking evening classes while working full-time,  by delaying college to work full time and save for college expenses, and so on.  See my post How to Graduate from College with Less Student Loan Debt for more ideas.
  • Delaying retirement may not be an option.  Recent surveys confirm that a significant percentage of American workers retire sooner than they had planned, usually due to health reasons or a layoff.  You may not be able to work longer to compensate for the retirement savings you spend on your children’s education.
  • Working a second job is easier said than done.  The rewards of working a second job will be far less than you imagine them to be; see my post The Hazards of Chasing Additional Income.  If you are a professional, moonlighting will probably detract from your performance at your  primary job.  Do you really want to put your full-time job in jeopardy to earn a few extra bucks so your children can graduate from college free of student loan debt?

Your children will be the beneficiaries of their college degrees by way of increased earnings over their lifetime.  Let them invest in themselves by financing their college education with scholarship money, their own earnings, and if necessary, student loans.  You can help them avoid unreasonable student loan debt by encouraging them to make financially prudent decisions with regard to the cost of their higher education.  I know from experience that if a child has a financial stake in her higher education, she will get more out of the college learning experience, because she will be motivated to put more into it.  It’s her money on the line.

Plan ahead and save for your children’s college education

If you feel you must pay for part or all of your children’s college education, then make a plan to save for it along with your retirement.  Start early and save aggressively.  To successfully finance all or part of your children’s education as well as your own retirement, you will need to keep a lid on your standard of living so you have the money available to adequately fund college and retirement savings simultaneously.  Use a 529 plan to accumulate college savings tax free.

Financing college with student loans is a good investment

Whatever course you take, don’t try to make up for lost time by raiding your retirement savings to avoid student loan debt for your children.  You cannot afford it.  Besides, repayment of student loans should not be viewed as a hardship.  When done prudently, financing a college education with debt is a good investment.  It is well worth the interest paid on a student loan to obtain a marketable college degree that will pay for itself many times over though an increase in earning capacity.

Average student loan debt for those graduating in 2014 was $ 28,400 about the price of a new, mid-sized automobile, less than the average cost of a wedding ($29, 858), and a whole lot more valuable.  Your children can handle student loan debt and prosper with a little guidance from you.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages

Use of Income Tax Refund Is Indicator of Financial Condition

How you  use your income tax withholding refund often indicates the condition of your personal finances at the time.  Consider the following examples:

  • Obtain an income tax refund advance loan to finance a trip to Disneyland:  You are willing to pay interest and/or fees for money you would receive anyway.  This indicates that you have little or no savings, lots of debt, and a compulsion to spend.  You could have saved the interest and/or fees on the refund advance loan by simply waiting a few weeks to take your vacation.  Financial Condition:  Out of control.
  • Use income tax withholding refund for down payment on a new car: You use your income tax withholding refund to get deeper in debt.  This indicates that you have little or no savings and a lot of debt.   Financial Condition:  Serious.
  • Use income tax withholding refund to catch up on payments and bills:  This indicates that you have no savings and a lot of debt.  You not only spend more than you earn, you cannot even make the payments on your debt.  Financial Condition: Critical.
  • Use income tax withholding refund to pay cash for a new leather sofa:  You prefer to spend money rather than use it to improve you personal finances.  This indicates that you probably have some savings and debt, but no financial goals.  Financial Condition:  No improvement.
  • Use entire income tax withholding refund to pay down or pay off debt:  You are concerned about debt and take advantage of an opportunity to pay it down or off.  This indicates that you probably have an emergency fund, some debt, a budget, and a plan to pay down or pay off your debt.  Financial Condition:  Improving.
  • Use income tax withholding refund to add to savings and to pay off or pay down some debt:  You use your entire income tax refund to improve your finances in a balanced way.  This indicates that you probably  have an emergency fund, some debt, a budget, and a plan to pay down or pay off your debt.  Financial Condition:  Fair.
  • Use entire income tax withholding refund to add to savings:  Accumulating savings is a high priority for you.  This indicates that you probably have little or no debt, an emergency fund, a budget, financial goals, and a plan to attain your goals.  Financial Condition:  Good.
  • Use 25% of your income tax withholding refund to purchase a new television and the rest to add to savings:  You balance the use of your income tax refund between spending and saving.  This indicates that you probably have no debt, an emergency fund plus other savings, a budget, financial goals, and a plan to attain your goals.  Financial Condition:  Excellent.

Of course, the examples above are based on broad assumptions and generalizations, but that doesn’t mean they don’t contain a nugget of truth.  An income tax withholding refund offers an opportunity to improve your finances, even if that means just getting caught up with your bills and payments.  Take advantage of the opportunity and build on it in the year to come by creating a budget and a plan to save regularly while paying down your debt.

K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based LifestyleDouble-Dome Publications, 224 pages