Is Living Within Your Means The Right Way to Live?

My favorite Yahoo! Finance writer Laura Rowley recently wrote about whether it’s always necessary to live within your means.

A basic tenet of personal finance is to live within your means – spend less than you earn. By following this one simple rule, you’re saving for the future and putting yourself in good position.

The question Laura tries to answer is why we have to live like college students now only to splurge when we’re older. Can’t we achieve the balance we’re looking for?

The conclusion Laura comes to is that we should live within our means except when it’s smart to borrow. The economist in the story says that we should have a spend now mentality because living without our means has no economic foundation.

While this can definitely work for some people and balance is important in all our lives, this is a hard plan to put into action for most people. Hindsight is 20/20, but the future is hard to predict. Can we really be sure that we’ll be making that much more later in life? If we don’t have the surplus we expect, will we look back and be disappointed in our past decisions?

Another question I have is about the effects of compounding interest. Maybe one of the reasons people have a surplus of money when they’re older isn’t just related to their income but also to their savings. If we spend more money when we are young, then we will be putting less into savings (and in some cases borrowing more).

By losing years and years of compounding interest, won’t we have to save more later in life to make up for it? Suddenly we’ll have to be making larger 401(k) contributions and paying off a larger mortgage because we didn’t put down as large of a down payment.

This is a slippery slope in my mind. When you are in medical school and know that you will be making a lot a few years down the line, I think it’s ok to spend and enjoy life a little more. But if you’re a teacher, it’s much harder to see how the riches of tomorrow will be able to cover today’s expenses.

Readers, do you think we should spend more now because we’ll have more later? Or is it just setting ourselves up for trouble?

5 Responses to Is Living Within Your Means The Right Way to Live?

  1. Compound interest is exactly the reason why that quest for balance can reduce your overall lifetime consumption. It’s not just how much you spend vs save, your savings’ growth is also a major factor in being able to splurge later in life (or retire early). Without as much savings growth in general you will be able to consume less over your lifetime.

  2. Completely agree that this is a very slippery slope and that you should always strive to live beneath your means. That may not be possible for a period of time (e.g., when taking on college debt), but no sense making things worse and extending that debt period based on (potentially delusional) projections for the future. The comments about the power of compound interest over long periods of time are spot on!

  3. Forest says:

    I really think you should work hard to live below your means and always have a surplus of cash. I didn’t and it’s taken quite a few years of my late 20s to get on the straight and narrow.

  4. Cathy Moran says:

    The fallacy in putting off saving or moderation early on is that the underlying assumption that “things get better over time” is not always right.

    What if you lose your job, lose your health, find your field of expertise is rendered obsolete? Life tends not to be a linear and upward path for everyone.

  5. Jackie says:

    I think it’s a mistake to suggest that living within your means equates to “live[ing] like college students now only to splurge when we’re older”. That’s not necessarily the case at all. I live way below my means and have plenty of splurges…

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