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Why Not to Live Within Your Means

Dan Stous,

June 30, 2017

Growing Your Wealth, Managing Your Money


We often hear the advice “Live within your means”, and we think of it as sound, prudent advice. Generally speaking, if we spend less than we make, we’re less likely to run into financial problems. However, are there certain situations during which that advice becomes not only irrelevant, but problematic? If so, what is a better way to think about how much we should spend?

To start, let’s think about the average household income in the US, which was about $70,000 in 2015 according to the Bureau of Labor Statistics. The average household spends about 10% of their income on food. So, a husband and wife earning $70,000 per year will spend about $580 per month on food, combined between groceries and restaurants. Now, let’s say the husband and wife both get promotions, and now earn a combined $90,000 per year. If they use a rule of thumb to dictate how much they budget for food, they will increase their spending on food to $750 per month, and they aren’t overspending on food.

It’s arguable that “live within your means” not only approves of adjusting spending to your means, but actually suggests that you should adjust your spending to your means. You can start to see the problem this creates in the example above. Originally, the couple spent $580 per month on food, and within a short period of time, that increased by 30%. It’s possible that $580 provided them with plenty of healthy food from the grocery store to keep them full, with enough left over for a few nights out at a restaurant. Will they actually be more happy by spending more on food each month? Or is there something else they could or should be doing with that extra income?

On a larger scale and over the longer term, these types of spending increases occur with housing and transportation (automobile) costs, which make up a combined 40% of expenses for the average US household. This translates to much larger dollar amounts than the food example. But is that necessarily a problem?

It depends on your goals. Goals are a better way to determine whether you are spending too much, opposed to comparing your spending to the average US household. What are your retirement goals, and are you saving enough to meet them? Are you anticipating any large purchases in the future that you need to be saving for, like replacing your dying vehicle, or saving for a child’s education? Do you have a sizable emergency fund that can take care of unforeseen expenses or circumstances?

If you have gone through the financial planning process either on your own or with the help of an expert, and you have a high degree of certainty that you are on track to meet all of your goals, then maybe spending more on food or a vehicle isn’t so bad after all. However, keep this in mind: research suggests that an increase in household income beyond an inflation-adjusted $85,000 per year doesn’t provide a material increase in emotional well-being, so the corresponding increase in spending may not bring you increased happiness. If and when your household experiences a salary increase, a bonus, or an inheritance, don’t automatically increase your spending. Live below your means. Think about opportunities available to you that can actually make a big difference in the long run. If you’re not maxing out your retirement or HSA savings, you have an opportunity to make a great financial decision. If you’re maxing out your retirement savings but aren’t saving anything outside of retirement accounts, you have another opportunity.

Read about what financial planning expert Michael Kitces has to say about what it means to live within your means. Interested in hearing insights from the experts at UIMG? Check out our investment updates on UBT’s blog.

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This blog article is for informational purposes only, and is not an advertisement for a product or service. The accuracy and completeness is not guaranteed and does not constitute legal or tax advice. Please consult with your own tax, legal, and financial advisors.