Personal Finance
It’s Not How Much You Earn, It’s How Much You Spend
By Five Cents Ten Cents  •  November 19, 2008
[caption id="attachment_820" align="alignright" width="150" caption="Photo by adobemac"]Photo by adobemac[/caption] When I was growing up, I remember thinking that I wanted to earn as much money as I could so that I could spend as much money as I wanted. Now that I’ve grown up, I realised that it’s not about how much you earn but it’s about how much you spend. Financial freedom is about taking control of your lifestyle and taking control over your expenses. The Straits Times article, “Credit Card Crunch” (17 November 2008), demonstrates aptly how people who were making $12,000 and $10,000 a month could still end up with unpaid credit card balances of $228,000 and $75,000 when their incomes plunged drastically due to the start of recessionary factors affecting the companies they worked in. Credit Card Debt - Living Beyond Your Means Credit cards are a tool. They allow you to spend first and pay later. You defer the payment but you don’t avoid it. Hence, if you use it wisely as a means to manage your cashflows by paying up within the credit terms (30 days), it is just a means of payment for you. But if you decide to only pay the minimum amount and rollover the balance, then you are effectively borrowing that amount of money from the bank at 24% per annum. At 24% p.a., a balance of $1,000 unpaid will rollover to become $2,000 in 3 years time. Your fixed deposits at say, 1.5% p.a. will double in 48 years. See the difference? Credit card or unsecured debt is a powerful and dangerous form of leverage. By borrowing at such high interest rates, you open yourself up to being made a bankrupt should you be unable to pay a debt. A person can be made a bankrupt for a debt of $10,000 and above. Being a bankrupt is no small matter. You are restricted in many activities and your credit history goes to pieces and you will find it very difficult or near impossible to borrow money in the future for a home or a car. Living Within Your Means The path towards financial freedom lies not in attaining a high income level. Of course, earning more money makes it easier to achieve financial freedom IF (and that is a very big IF) you manage to live within your means. Someone who earns $10,000, lives a lifestyle that spends $9,000 will have only $1,000 per month in savings. Another who earns $4,000 but saves $1,500 per month will end up saving MORE than the person who earns 2.5 times his income. Lifestyle inflation is something we have to be aware of to avoid this trap. To become financially free, you need to learn the lesson of living within your means and sometimes even below your means. This frees up cash savings that can be channelled into savings and investment. Read more...
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By Five Cents Ten Cents
PanzerGrenadier is a 30-something accountant who finally grasped the concept of financial freedom at the ripe old age of 32. Ever since, he has been travelling on his journey towards financial freedom and documenting his adventures through his blog "fivecentstencents". PanzerGrenadier allocates his non-work time in between living within his means, saving and investing as well as spending quality time with family. He is an avid toastmaster and has completed 10 years of being a reservist conscript in the Lion City.
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6 Comments

6 responses to “It’s Not How Much You Earn, It’s How Much You Spend”

  1. Panzer says:

    Hi Derek

    You’ve changed your theme. What theme are you using? Is it a free or premium theme?

    I’m thinking of getting Thesis but it costs USD 87… May want to try it out or maybe search for more sophisticated free themes first.

    Looks cooler than the earlier version. :-)

    Be well and prosper.

  2. Derek Lim says:

    Hi Panzer,

    It’s a premium wordpress theme by WooThemes. I did compare it against Thesis. A single theme cost USD$70 while for USD$150, you can get to use all the themes and any new themes released for 3 months. However you can only use it on 2 websites.

    Regardless of which premium theme you decide to pick up, the most important aspect is the support structure. How quickly you can get help to resolve your problem is important.

  3. Panzer says:

    Hi Derek

    Thanks for the info. I’ll continue experimenting with free themes for the time being and probably make a switch to coincide with 1 Jan 2009.

    Be well and prosper!

  4. Brendan says:

    “It’s Not How Much You Earn, It’s How Much You Spend”

    In this crisis, my employees will be losing job, so they earn zero.

    Doesnt it matter?

  5. Panzer says:

    Hi Brendan

    What I’m saying is that to be financially free, it’s more important to be able to live within your means and not overspend even if a person’s income level is $12,000 or $10,000 as cited in the Straits Times article.

    People who earn $10k can still be close to bankruptcy while people who earn lesser can have a higher net-worth in the long-run because they live within their means, save and invest and grow/protect their means. :)

    Be well and prosper.

  6. Panzer says:

    Hi Brendan

    A high income is helpful towards financial freedom, but if one’s lifestyle is equally high, then it leaves little for savings and networth especially if one’s assets are spent on conspicuous consumption e.g. branded car, luxury handbags/watches etc.

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