Continuation from the last article..
If you drive a stick shift car, then you are likely well aware of the dangers of redlining. Redlining refers to the red area on the RPM meter; This is the area above which the engine is designed to be safely operated. In terms of spending habits, riding the redline consistently will not only hurt your financial health, but will surely cause you problems down the road. When driving a stick shift car, it is important to shift when necessary so you don’t break your car, or your bank account. In terms of finances, redlining can be defined as spending or taking on more debt than your income can afford. Which is the opposite of creating wealth.
In last week’s article, I emphasized that becoming wealthy means that you absolutely must spend less than you make. This still rings true, but it is very important that this principle isn’t over simplified or misinterpreted.
Living by this simple principle means that you must spend less than you make at every spending opportunity. The simple mind will look at their spending on the most basic of levels. I am very much guilty of this, as are most of my millennial friends. It seems so easy to justify spending $400 of your $600 dollar pay (post rent) on clothes, sunglasses, shoes, clubs, restaurants, bars etc. because technically, you are spending less than you earn. You may even think to yourself, ‘If worse comes to worst I will just skip a couple of meals.’
When most people think of the word expenses they think of the bare minimums such as
- Rent, water, electricity
- Going out
As a 20-something these are probably, the big expenses that you have to pay. From my personal experiences I have justified my frivolous spending on material items by making sure that these three bases were somewhat covered before I just went for it. This mentality is flawed, there are many other expenses that we tend to forget about, these include: lunch at work, Netflix, Spotify, gym membership, late night street meat, refilling bathroom supplies, dry cleaning/wash and fold, that extra round you bought everyone when you were already wasted, movies, dates, 5% to savings and many other random expenses that come along with living in the city. These are the extra expenses that will cause you to redline your personal financial health that you need to remain cognizant of (and don’t forget, just because the charge went on your credit card doesn’t mean that it shouldn’t be counted in your expenses).
When we’ve already spent all the money that we have early on in the pay period because we decided that we needed new Allen Edmond oxfords or those Jimmy Choo heels we are left with a credit deficit because it turns out they were just not our 20-something year old personal budget, go figure.
When I tell you to spend less than you make this means spend less after every single expense has been accounted for and sometimes this means that you actually don’t have enough money to drop $500 on a new suit or hand bag one Saturday of the month because it just doesn’t work within your means (also remember to base your income on your take home pay and not the amount you get before taxes). You can’t afford to be redlining. Redlining is bad for your financial health and makes saving impossible. The hardest part about credit card debt which is inevitable at our age is trying to save and pay off the debt at the same time. If you really really want to be wealthy you have to be consistent and strict with your money until you actually can afford to spend a little. I will be the first one to tell you that every once in a while its fun to rev the engine and redline a bit, splurging on something big but making a habit of this can become a downfall to any wealthy person.
Now is the time to save and skip the redlining because it only gets harder as life goes on and gets more complicated!
Stay tuned for part three of the spending sections.