Sally was frustrated.

She reached out to me because she is worried that she’s not saving enough for retirement, nor does she have much in terms of savings at the moment. She’s roughly fifteen years away from retirement and there are several expenditures looming in the coming year, including replacing aging appliances. “Where will the money come from and how can I possibly be ready for retirement,” she asked?

Here’s the challenge: She feels she is doing everything right – earning a great salary, paying all her bills on time, avoiding credit card debt, never spending more than she earns – but she still can’t save a dime.

I get it; that’s frustrating as all get out.

“Doris, you talk a lot about the importance of women learning to invest, but I can’t even think about it. At the end of the month, I have little left over. What can I do?”

Sally’s example illustrates a commonly-held belief that living within your means is the gold standard of personal money management. If you spend less than you earn, you should be fine financially, right?

Not necessarily. You’ll be fine simply living within your means if the following statements are true for you:

1. You have an emergency fund in place to carry you through true emergencies.
2. You have a savings account for Planned Expenses.
3. You set aside funds every month, or year, to build a sufficient nest egg for retirement.
4. Your essential expenses are fully covered without incurring debt – a roof over your head, good food on the table, etc.
5. You have enough money to spend on the things you value most, without incurring debt.
6. You have cash left over when it’s all said and done.
7. Have I said anything yet about not incurring corrosive debt?

To be blunt

If, like Sally, your balancing act doesn’t include money for growth and protection, you’re headed for trouble. Ditto if your monthly routine means adding to, or maintaining, credit card debt.

I’m sure it’s been at least ten seconds since I’ve said this: Credit card debt is evil. It’s a double-edged sword that will drain the life right out of your present and your future. If you have this type of debt, you are not living within your means.

Sally, however, doesn’t have credit card debt, so what’s the issue?

What you’re not told about the typical approach to living within your means is that its success depends on how big the gap is between your earnings and your expenditures. If the gap is razor thin, you may not go into debt, but you also won’t save, invest, and get ahead. It’s the ultimate example of holding steady and hoping that nothing big will tip your financial boat.

Odds are something will come along to rock your boat at some point. What then?

The winning formula

Here’s what I told Sally: Most people live like kings and queens, but save like paupers. What if we reversed that formula? What if, instead, we lived like a pauper with benefits and saved like a queen? What would that do to our outcomes?

Question everything

When I made the above suggestion to Sally, she protested. “But I don’t spend on non-essentials! I eliminated all the extras. My only treat is an occasional pedicure.”

In roughly thirteen years of helping people improve their finances, I can count on one hand the people who admitted they were probably overspending somewhere. Everyone else insisted, initially, that they had cut back their spending to the bone. Until, that is, we started to do some digging.

I asked Sally to create a list of all her expenditures and to group them in two columns: Essential Expenses and Other Expenses. The list of essential items was a mighty one. Then I asked her to tell me about her top values, the things that matter most in her life. With this information in hand, we got down to the hard work of getting Sally to live well beneath her means. For every item she put down on her lists, I had her answer a few questions:

• How would an educated, neutral observer classify that expense?
• Would they say it’s essential?
• Would they say the amount you spend on an item fits your values, goals, and budget?
• What would they remove or cut back?

Question everything, especially if you feel yourself becoming defensive about an item. What’s behind that emotion? Keep digging until you figure it out. It’s an uncomfortable but productive process that will free up some cash, unless you’re not earning enough to cover the basics. In the latter case, you’ve got an income problem, not a spending problem.

Sure spend, just not that much

Just because an item is in your Essentials list doesn’t mean you have to spend that much on it.

House or apartment – You need a roof over your head, but does it have to be a $500,000 roof? Or a fancy condo? (Don’t get me going on condos. No, really.) Could you downsize and reduce the amount of monthly expenses in the process? As a bonus, you might also free up equity that could be used to invest for your retirement.

For many people, their house is their sacred cow. They love their house, their neighbourhood, their neighbours (well OK, most of them), and their schools. Asking them to question where they live is blasphemy. But what if you could have all those same benefits with a fraction of the costs? Wouldn’t it be worth considering?

As far as I can tell, there is no downside to considering all options to solve a financial conundrum. That’s how I paid off $400,000 in two years – I put everything on the table and started to ask “What if?”

Sally argued that she wanted to hold on to her large house. Her adult son is living with her to save money for a down payment and her daughter visits regularly. Maintaining close relationships with her family is at the top of Sally’s list of values, so ensuring that she has a space to welcome kids and extended family in the house is important to her. Still, she could achieve that with a less expensive house. She could also consider charging her son rent or at the very least ask him to contribute money to cover the cost of having him in the house.

It is counterproductive to harm yourself financially while helping someone else. Making yourself weak serves no one. First, fix your own finances and then help others. It’s the whole mask-over-your-face-first approach. Besides, her son isn’t learning to manage his own money if he’s living for free at mom’s place.

Car – Could you select a less expensive, more fuel efficient model? How about buying a one- or two-year-old car instead of paying the instant depreciation baked into a new car?

Could you use public transportation to get to work? Walk or bike more? Carpool?

You might need transportation to get around, but the amount you spend in this area is up for consideration.

Food – Sally describes herself as a foodie who loves great quality food. She spends several hundred dollars per month feeding herself and her kids. Could she cut back on those costs without affecting the quality she enjoys? Does she really need to feed her adult, fully-grown, working kids?

Health – This is my favorite. The number of things I’ve seen on “absolutely essential for health” lists is incredible. I’ve even seen wine on a list! I’m as committed a red wine drinker as it gets – I have been known to cull articles that boast of wine’s medicinal benefits for ammo in discussions with people who are teetotallers – but let’s get real. Without wine, you will not die. (I can’t believe I just said that out loud.)

You get the idea here.

Reverse the order

I once got a great piece of advice: If you want to be successful in life, look at what others are doing and do the very opposite. This holds for your finances.

From what I saw in my years of working with families, many people start by spending the money they make and when they’re done, they see if there’s anything left over to save and invest. No wonder our savings rates are so low!

To build wealth, I suggest you approach your finances in this order instead:

1. Make money.

2. Pay off corrosive debt. When finished, build a fund for Planned Expenses and then an Emergency Fund. Automate this step.

3. Invest money for your future, even if it’s an itty-bitty amount every month. Automate this step.

4. Spend on essentials – remember to question everything here. Automate bill payments.

5. Spend what remains on your values and things that bring you joy. (Mmmmm, red wine.)

Let me know how it works out.

Coins photo by pina messina on Unsplash

Wine photo by Lana Abie on Unsplash