Budget Living: 3 Good Habits That Outlived Their Usefulness?
Are these three financial good habits just too simple for today’s world?
These are certainly very basic personal finance practices, but it doesn’t seem that many people are still applying them.
Have these fundamentals of finance outlived their usefulness?
The three good habits of personal finance that used to work
I generally believe that simple is better. When things are easy and straightforward, then I can be more consistent with them, but maybe these basics are just too simple.
What are these good habits? Here are the ones I am speaking about:
1. Spend less than you earn
In the past, people believed that you could save to become rich if you simply spent less than you earned.
It wasn’t about how much you made. It was about how much you spent.
If you kept your spending under control, you could save what was leftover, invest it wisely and over time create wealth.
Many people followed this model. They worked earning modest wages, lived a simple lifestyle and all the while crammed back thousands of dollars into investments.
By the time they reached their 50s and 60s, these people were the millionaires next door. They didn’t let the fact that they never earned a high salary deter them from amassing a fortune. They just worked hard and saved toward their goal.
Today, it seems many believe that it is wiser to leverage debt to have a luxurious lifestyle without having to wait so late in life to enjoy it.
Many also believe that an enormous income is necessary to become wealthy.
Is this the new wisdom? Have I missed something?
2. Pay yourself first
In the good old days, people believed that in order to pile up riches, you had to pay yourself first. For example, you saved the first 10% of your income.
You took this off the top before you spent anything or paid anyone else. You paid yourself first because you knew if you didn’t that there wouldn’t be any left over.
Again, many people applied this principle in their financial lives very successfully in years gone by. The first thing they budgeted was how much they wanted to save.
Of course, savings itself is pretty old-fashioned. Why save? You can just whip out a credit card to cover any unexpected expenses or to get something you want now.
Today, we pay the bills first. We can’t get behind with a creditor or they’ll ruin our FICO score. Our credit score has replaced our reputation, character and frankly our means to pay as the defining variable in our lives.
Without a high enough FICO score we can’t get a job, a place to live or insurance.
All hail the credit score! Pay the (master)card first or else!
3. Neither a borrower nor a lender be
In the past, it was actually shameful to have to borrow money to purchase items. It was an admission of weakness and failure.
Many of you may have read Abraham Lincoln’s letter to his stepbrother that eloquently lays out why not to loan others money especially family members.
Lincoln points out the many complexities of being a lender. He felt it was generally against the best interest of both parties to engage in debt.
Today, our entire national economy seems to hinge on the ability to borrow money. We’ve loaned it too easily to people that couldn’t afford it and thereby created ourselves a mess.
Now our government is loaning money to insolvent companies that failed in managing the loans and other financial deals they made. Oh, what a tangled web we weave!
Would you loan a friend money that had a proven track record of sorry financial decisions?
It doesn’t make a lot of sense, does it? Damned if you do and damned if you don’t. This is the kind of trouble we could have avoided by being neither a lender nor borrower.
What’s your opinion of these three good habits?
Usually, you need to get the fundamentals right before moving on to the more complex aspects of any discipline.
We are deep into March Madness so, let’s take basketball as an example. Should you practice executing a coordinated zone defense before you can effectively dribble and rebound? What about shoot a free throw? It wouldn’t matter much, would it?
Doesn’t the same hold true in managing our finances? Shouldn’t we be solid in the fundamentals before moving on to more complex ventures?
It seems we as a nation and globally have violated the fundamentals of personal finance. We have gotten the cart in front of the proverbial horse.
It seems to me that these old-fashioned personal finance ideas need to be reconsidered.
It seems if we would have heeded the advice of the wise ones, we wouldn’t be experiencing the problems we face today.
Maybe I’m just too simple. What do you think?
Photo by billaday
These rules sum up exactly where I’m trying to go with my life. If I can live by all three, I’ll be happy.
I think the rules are just as valid as ever – people just forgot about them. No one wants to believe things are ever as simple as they seem.
@The David – Sounds like you are headed in the right direction. I firmly believe these principles are the only way to truly build and preserve true wealth.
Thanks for sharing your thoughts!
I think in general those are great rules, but I feel like the pendulum is swinging a bit too far the other way with debt. Most people think of debt as credit card debt for a big screen TV, but there are valuable ways to make use of debt in your life. At the same time I think you can live a useful, productive life without it, but I fear that many people may miss out on opportunities in the future because they’ve become overly afraid of debt.
Read Brad´s latest article – AIG and Populist Rage
What was old is new again and that which was new is now old…
Setting aside 10% off the top and living off less than you make ALWAYS works. It may be slower and it may take longer but it ALWAYS works.
Debt Leverage can work and may work faster but it has a devilish downside that many are facing today.
It really is the toutoise and the hare. The hare raced out and leveraged homes and cars and looked quite wealthly for a season. Now the tourtoise simply plods by the courthouse where the hare is fiing for bankruptcy.
Why mess with grandma’s recipe?? It works!!
Thanks for reminding us of these great principles!
Dave
Read Do You Dave Ramsey?´s latest article – meme…
@Brad – I also believe you can live a life without most kinds of debt (maybe all kinds). I do still have a mortgage that I’m paying off. Buying a home without a mortgage is possible, but probably not a hill too many will climb. This is one of the few examples that I can think of where borrowing money is acceptable to me. Can you offer others?
@Dave – Slow and steady wins the race! I love it. I like the sure thing.
Thanks for sharing your thoughts!
If more people followed these habits, we’d be in a lot better shape. These things are simple, but not simplistic. Easier said than done for many.
Read Bible Money Matters´s latest article – When Renting A Car, Save Money By Not Paying For The Extras
Great reminders here Jeff. I think #1 is pretty much the foundation of all financial advice. If you aren’t spending less than you earn, you will drown in debt.
Stumbled.
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I grew up watching my parents follow these three habits and I role model the same in my life. I’m glad you wrote about this, Jeff.
So much stress arises from poor money management. Learning to live within your income makes you contented (note:contented doesn’t equate to not being ambitious) and gives you peace of mind that you can take care of your family in exigent circumstances.
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May be basic but nevertheless needs to be stated and repeated.
My opinion – good tips, but too general. People need specifics to reach success.
Two thumbs up on all 3 principles!! I have tried to comply with the first 2, but my dh got us snagged in the 3rd one! His son needed a “signature” (co-sign) to his mortgage..we ended up being the primary owners, he could not even qualify to be a co-signer (found out on the day of closing, great!), then it was to be for only a year. Well, 2 re-fi’s, 5 years later & NEVER a check on time to us, I threw down the hammer & told DH that he could NOT retire until that mortgage came out of our names!! It caused more distrust & disharmony in our marriage than I can ever explain. Having been on the end of heartache from this experience, I would plead with anyone contemplating to ask a family member for a loan, PLEASE DON’T!!! (this taught me to take a breath, pause & tell anyone, asking me for anything to be patient & let me have the opportunity to think things thru & to investigate the matter if needed)
Those 3 tenets of personal finance are still excellent foundations for being financially healthy. Great post.
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Actually who have hit the bull’s eye. The three principles have surely outlived their usefulness.
Like what you said, it’s hard to become rich just by collecting leftovers. And by the time one gets rich, they are already on a decline physically. So they seldom enjoy the goodies the money can bring. The money if made available in late 20s and early 30s can be an altogether different experience.
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I completely agree with the tenets of all three of these points, although I disagree a bit with the shame aspect of borrowing money. Although I completely 100% agree with avoiding the need to borrow money at all costs, sometimes people find it necessary, due to their situation.
Do I feel that people should be borrowing money on frivolous things though? Definitely not!
The thing I think is most important and valuable about these tips is the simplicity involved. They really are so simple to remember, and they sure make personal finance seem less complicated!
Read Jason from MoneyTheory´s latest article – Do it yourself, or have someone do it for you?
You are absolutely on target. Just a few months ago, we did not have any money in savings, until we began making a conscious choice to pay ourselves first. Now, we not only have savings, every time we get extra money, the first thing we do is add to our savings. It is no burden at all, and it’s a good feeling to watch our savings account growing. I used to say we could not save any money. I was wrong. You don’t miss it if you pay yourself first, and everything counts, so even if we can’t save hundreds at a time, it still adds up.
[...] at My Super-Charged Life goes old-school on us by reminding us of 3 financial principles that have been forgotten by most but have recemmeted their value in recent [...]
Those are still very sound principles! The first & third habits are ones we rigidly adhere to.
On #3, I’ll gladly let you borrow a tool; I’ll lend you my car; I’ll loan out my services (weak mind, strong back); But I won’t be your banker. Oh sure, I’ve spotted a friend $10 or $20 for a day or two, but I do so with no expectation of repayment – I never lend money that I’m not fully prepared to lose altogether.
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Really good stuff. Since you brought it up – the whole government bailout mess – I hope we as a nation wake up. What the government does would put private citizens in prison. In fact I think Madoff is going to prison for 150 years for running a ponzi scheme which is the Federal Government’s M.O. First they screw things up and then they compound the problem.
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I liked your basketball reference, however, I think it’s backwards. Having learned the game from my then-school age daughters and their assortment of coaches, I’d argue that learning ANY defense even before dribbling and shooting is a MUST. Even a beginner can get a lucky shot through the hoop… and even a beginner can plant her feet and raise her hands in the air, effectively blocking potential shots. If you want to convert this back to finances, planting your feet and keeping a strong defense (building savings) are your best bets for shutting down an agressive offense (seductive and debt-inducing purchase power).
Oh, but what a fun way to look at finances! I’m gonna work on my defensive game!
These are 3 must things you need to do. If you spend more than you make you will never get ahead. You must pay yourself first if not you will always behind.
Read B Simple´s latest article – Simple Personal Financial Tips and Reminders – Week 12
For years I’ve been in the position of earning very little (working in non-profit then building businesses) so the first two ideas of saving and paying myself first are kind of laughable (I’m not there on the hierarchy of needs), but what amazes me is the number of people in my situation who still think they somehow deserve the big screen TV, the large home and fancy car.
It seems pretty obvious to me that if you don’t earn much you don’t spend much. Period.
But then again maybe my non-consumerist ways are unrealistic and unpatriotic…
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First rule to save for years. I did this only to have a husband run off with all the millions we had saved and leave me with a massive pile of debt. — Lesson learned!
(My lesson learned is keep your own name and your own money don’t mingle anything with anyone for any reason.)
Second rule never a borrower or a lender be. I have learned this one many times over in life.
I have to say. Lesson learned multiple times the hard way.
First if even a spouse wishes to borrow from you , then they are not being a very good spouse are they, they should actually be able to hold up their end of the bagain, if they can’t they should turn to other avenues and not lean on your resources. We each get our own bones and teeth , we each need our own retirement plans and we each have our own financial responsabilties, if things are not going well get creative, but don’t ask your spouse to sacrafice the 401K before you have looked at every avenue yourself. I also loaned money to children on the promise it would be returned in just weeks when they got their big college loan check only to have them spend all of that too and conveintly forget they owed me money. This is a great policy, never a borrower or a lender be, It only builds resentment in relationships.
Lesson 3- Pay yourself first, I can’t say I ever actually applied this as I believed income vs spending whatever your income is your spending should be less therefore you can pay yourself first or last it does not really matter. In todays time I do think this lesson is best, as if the kids of today do not pay themselves first there will never be a time when they can pay themselves. I would highly recommend they pay themselves in a manner that the money is kept in a safe place , perhaps a safe in the home would be best. Banks are folding, the IRS dips into even grandma’s checking account for the last $40 dollars that she owns. Pay yourself first but make certain you actually pay you and not some bank.
It may go back further than our grandmas and grandpas. It seems even the Babylonians got to be rich and powerful following these 3 simple steps.
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