Living Within Your Means

Living Within Your Means

I remember reading about Ronald Read many years ago and being reminded of why I started this financial success journey. Ronald was a janitor who amassed an $8 million fortune through frugal living and a buy and hold investment method. Before his death at age 92, his only indulgence was eating breakfast at the local coffee shop. He chose to park his car far away, where there were no meters, so that he could save the coins. He's not the only such story. I started to seriously manage my finances when I read about another similar story of an old lady who worked as a street vendor but donated millions before passing away. While I admired their frugal lifestyle and generosity in giving away their life savings, I didn't want to save money without spending for the rest of my life. I assume most people feel the same way as me when it comes to this. I still didn't quite understand how much money I should budget for myself each month.

After graduating from university, I wanted to make lots of money as any ambitious young man would desire. I naively jumped straight into the financial industry and witnessed the extravagant lifestyles of the traders in the big banks. I still remember the first day I went out to a steakhouse with the senior traders. I buried my head in the menu, trying to find anything under £100, and it looked like I could only afford to eat a bowl of salad at this particular steakhouse. A trader noticed my nervousness and ordered a £1000 steak while telling me he would cover my bills for the night. I told him I couldn't help to feel that spending £1000 on a single steak meal is such a waste of money. There's so much I can do with a £1000 instead of spending on a meal for one night's pleasure. What the trader told me next blew my mind and changed the whole perspective on how money should be spent. He said that an average paid professional would spend about £80 a night to have dinner and drinks. That is about 2-3% of that person's monthly income, which is reasonable. By that logic, he is willing to spend up to £3000 that night because that's 2-3% of his monthly income. That night, I learned one crucial thing about how I should spend money.

"Living Within Your Means" is knowing how to spend money proportional to how much you make.

I needed to create a simple set of rules that I could follow to keep me in check with my spending each month. After some iterations, I finally arrived at a method that I could consistently follow: the Monthly Cashflow Analysis.

When I decided to apply this method in my life, I was a young single professional who drove a nice sports car and lived in an expensive downtown condominium by the lakeside. I woke up each morning looking down on a beautiful lake and the busy streets below my feet, feeling refreshed and ready to crush the day. From the monthly profits after the living expenses, I set an ambitious split of 20% free-spending and 80% investing, thinking that the aggressive investing would get compound quicker and make me rich faster. But I was shocked to find out that such a split would leave me with a tiny free-spending budget to go out and have fun for only one night in the entire month. That was just ridiculous and unacceptable as I would go insane working all the time without having fun to decompress. My only option was to either increase my income or decrease my expense to increase my monthly profits which will result in increased free-spending after the split. I had just started my career, so I didn't think getting a promotion to increase my salary would happen anytime soon. All other methods of increasing my income required me to learn new skills, build my portfolio, and learn to invest, all of which would take some time to make an actual impact. If I wanted to make a substantial improvement right away, I realised it would have to be by cutting my expenses first.

Selling the car away was an obvious first choice. I barely drove the brand new sports car I had for two years; during this time, I had only driven it for less than 20,000 km. It was a heartbreaking experience to hand over the keys to the new owner and still have around £20,000 of financing debt to pay back to the bank since the car had depreciated so much from the moment it left the factory. I spent many following months putting all my energy into paying back the car-related loan. With all the car-related expenses vanished, I finally got some breather, and my increased free-spending budget would allow me to enjoy three nights out rather than one. However, this was nowhere close to being enough for me as I enjoyed hanging out with friends after work often, and I realised I valued that more than living in a fancy downtown condominium. I decided to live a minimalist life, sold everything I owned (furniture, games, musical instruments, etc.), packed everything in one luggage bag, and downsized to renting a room. Without even planning it, I found myself in a complete reset where I had no debt, no money in the bank, and no assets.

One good thing about a complete reset is that you are always moving forward and never backwards, no matter how small the step. Every investment I made to earn more dividends made me richer every month, and I felt it with my monthly free-spending budget increasing slowly but surely. Don't get me wrong, the first five years of following the strict 20/80 split were still excruciating. Sure I could afford to go out many times a month to have fun, but I always came back to the crappy room I was renting. However, this was surprisingly bearable when you see the improvements you are making in your free-spending, no matter how small the increment is.

Fast forward to today, I stayed disciplined and followed almost the same method for nearly 20 years, and during this time, I've only made one slight change. When I got married, I no longer wished to be so extreme in my monthly profit splitting and wanted to loosen up just a tiny bit to enjoy the life I would be spending with my wife. So the split has been adjusted to 30% free-spending and 70% investing ever since.

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