Last week I started a series called “Personal Finance Basics“. In the series I plan on talking about basic concepts of personal finance, going back to the simple concepts that we sometimes forget or ignore. Last time I talked about the idea of paying yourself first in order to ensure that your savings grow – instead of having your money mysteriously disappear.
This time I want to talk about another important concept – living below your means.
The Lure Of Easy Credit
One thing that this generation has done is to forget the basic concept of how you create and grow wealth. The ideas of easy credit and buying things before you have the cash have taken hold. Whereas our parents would save up and pay cash for the things they bought, when we have a whim and desire something – we just buy it.
The average age at which a U.S. consumer under the age of 35 first adopted a credit card is 20.8 years. The average age of credit card adoption for a consumer over the age of 65 is 40.6 years. (Source: “The 2008 Survey of Consumer Payment Choice,” Federal Reserve Bank of Boston)
The average age that we started using credit has dropped as time has gone on. Using credit and going in debt has become more acceptable. Millions of people have acquired debt and gone thousands of dollars in debt.
Total U.S. revolving debt (98 percent of which is made up of credit card debt): $852.6 billion, as of March 2010 (Source: Federal Reserve’s G.19 report on consumer credit, March 2010)
So revolving debt in the U.S. has grown to near 1 trillion dollars. That can’t be a good thing!
So what can you do about it?
Spend Less Than You Earn And Live Below Your Means
Thomas J. Stanley in his book “The Millionaire Next Door” talked about millionaires and what the greatest factors were that lead to their creation of wealth. Contrary to the picture that many people hold of the wealthy, the picture of the lavish spending, expensive cars and expensive homes, most millionaires that he interviewed were rather frugal. They lived well within their means – and most lived below their means.
He said that the average millionaire doesn’t have material things just to have them:
We wear inexpensive suits and drive American-made cars. Only a minority of us drive the current-model-year automobile. Only a minority ever lease our motor vehicles. Most of us (97 percent) are homeowners. We live in homes currently valued at an average of $320,000. About half of us have occupied the same home for more than twenty years. Thus, we have enjoyed significant increases in the value of our homes.
Millionaires don’t feel the need to display their wealth, or show off by living in fancy neighborhoods and drive a fancy car. They live below their means, make thoughtful homemade gifts, buy quality things, and don’t focus on brand names or status symbols. They enjoy the good things in life, but also know good value. They know how to live on less than they make. In fact, for many of them, their frugality and living below their means is one of the primary reasons why they have created their wealth.
So what do you think – is living below your means an important piece of creating and growing wealth? Tell us your thoughts in the comments!