Always Live a Year Behind Your Means

Giving financial advice is a sensitive subject, and I am not a licensed professional. As such, this post is meant to be demonstrative only and should not be considered as me giving you financial advice. Make sure that you consult a professional with any questions you may have about your own personal finances. 

This month’s advice was given to my friend Brandon by his father as we were graduating from college.

“Always live a year behind your means”

Such a simple, poignant phrase that can mean many things to many people, but always centers around the concept of spending less than you earn. This advice has stuck with me for the past 10 years and has helped keep things in perspective at many inflection points along my career journey.

The rest of this post will discuss how minding this rule can make a tremendous opportunity on your career options and how it may even contribute happiness in other ways.

Let’s start by breaking down the phrase into what I think it means. As you enter the workforce and start making money, always keep your expenses low, as if you were making less money than you are actually earning. Budget your spending for next year based on your salary from the year before.

For example, even after you receive your first job out of college, spend money and live as if you were still in college. If you do this, at the end of the year you will have extra money in your bank account.

Save the extra money for a rainy day, paying off student loans or put it toward retirement (even though that is hard to fathom in your early 20’s), etc. As you rise the ranks of the organization, continue to live a lifestyle that is below your current means. Save the rest of the money.

Do this long enough and you will have accumulated a fair amount of money and created the key to career freedom in the future.

Financial freedom enables career freedom

How does this create freedom for your career? Well, being in a solid financial position affords a level of freedom that many people do not have. That feeling of freedom enables us to take risks to improve our situation without major concern for short term financial needs.

What types of opportunities are we talking about? One example is taking a lower paying job with an up and coming company that provides you with stock options in addition to the salary. You can take a job with that startup if you have long lived behind your means.

You can start your own company and put your full concentration behind generating a great product or service if you are financially free.

Even within your current employment situation, you can try to initiate a “high risk/high reward” change in your organization without worrying about the implications if it does not go well.

In other words, you can take more risks when you have lived behind your means over the years. You can confidently tell your company when you think they are doing something wrong without worrying about the financial fallout of getting fired. You can pursue the dream career that you actually want.

Making some assumptions about growing salaries

So far we have painted a picture that assumes your compensation will always go up or that there is minimal variability in what you can expect to be paid. If you are in a scenario where your wage may rise or fall over time, then consider a less literal interpretation of the “year behind your means” advice and budget based on an amount of money that will allow you to spend less than you earn.

A specific scenario where this advice can be difficult to follow literally is if you have a job with a variable payment structure (for example, a commission based job like a realtor, recruiter, salesperson, etc.). There may be some years where you make a LOT of money and others where you make half or one third as much money.

In these cases, you will want to set your budget as if you are going to make the lowest amount of money possible each year and look at any variable compensation as a bonus/savings opportunity. Following this method in good years will allow you to save 1-2x your lowest salary, while allowing you to weather the storm of the economy around you in bad years.

There are other scenarios where you are in a career that simply doesn’t pay you enough money to live. This is the reality for most American workers. While spending less than you earn is still sound advice for anyone in this scenario, you may also want to explore careers that are in-demand now and are projected to stay that way into the future. *Note: This is easier said than done and I have a lot of empathy for anyone who pursues their passion in a low-paying career field. It's not easy. 

My personal journey in heeding this advice

When I first entered the workforce I didn’t follow this advice and I paid dearly. I bought a house and new car. I decided it was necessary to furnish my entire house using a credit card and made countless other mistakes.

I lived years ahead of my means, accumulated lots of debt and I was a financial meltdown waiting to happen.

Fortunately I had a skill that was in-demand at the time, and I was able to freelance as a web developer in order to make ends meet and get out of debt. Eventually freelancing became my full time employment and a successful career, but it took years to reach the point of financial equilibrium.

After that harsh lesson was learned I have heeded this advice every day since. I budget based on the least amount of money I think that I will make in a year and live within those means. Any extra money that may come in is saved for a rainy day (or used to pay off loans and fund retirement accounts).

Over time it got to the point where I felt I had complete freedom to take risks in my career, and one of those risks is the website brings you here today. I decided to leave behind an excellent career to focus on finding my true passion. Living this advice every day for several years now affords me the ability to pursue my passions like Knowledge Land and Jeffalytics. Things might work out, or they might not, but they are only even possible because I followed this sage advice.

It's never too late to start

No matter where you are in your career, there is something to be learned from this type of thinking. Whether you want to be an entrepreneur or just more appreciated at your current job, following this advice may be the key to achieving your goals and pursuing your passion.