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The Reason You Are Living Beneath Your Means

July 29, 2008

Posted by Roshawn Watson under Uncategorized

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By: Roshawn Watson

Unfortunately, when most people “prepare for retirement,” they are actually preparing for poverty. I recently read a sobering statistic that up to 96% of retirees do not have cash flow sufficient to pay for their expenses.

I read the perfect example just yesterday. The article was about a 72 year-old lady who still had an $80,000 mortgage. She was trying to live on a monthly Social Security check of $1,100. Sadly, she will likely have to move if she wants to eat!

Obviously, debt is not just a problem for retirees: it transcends demographics. Regardless of whether you are a baby-boomer or a recent graduate, you need to build your nest egg. However, one of the biggest threats to your wealth is debt.

Debt will not only keep you in bondage to your lenders but also will increase your risk exposure while simultaneously decreasing your cash flow. Carrying debt long-term, i.e. like into retirement, is a bad plan and will steal your life if you allow it.

In fact, debt is the primary reason senior citizens are the fastest growing number of bankruptcies followed by college-aged young people.

Perhaps, one of my biggest wake-up calls was when I realized that debt forces you to live beneath your means. This is somewhat counter-intuitive. If a person spends a lot of money on stuff, we generally say that the person is living “above his means:” that he is currently spending more than he can afford. However, once he (or she) starts paying for this stuff, then he is forced to live beneath his means because his cash flow, and consequently his ability to build wealth, is diminished.

Perhaps John Cumalta said it best. “If 42% of your after tax income goes to credit debt payments (including your house), these purchases from the past are forcing you to live on 58% of your present after-tax income. Someone who is debt-free and making exactly the same income as you has that 42% to spend and invest.”

This is why when surveyed, 75% of the Forbes 400 said the best way to build wealth is to become and stay debt-free. That’s because once you are free of debt, you can systematically invest. Long-term, you can create phenomenal wealth with strategic financial planning. This also explains why those who are indebted to others (i.e. banks and other lending institutions) generally have sub par savings and investments compared to their debt-free counterparts.

An unconstrained income will give you such liberty and control over your family’s destiny. Never mortgage your future for a “big” house, new Prius, or anything else. The borrower is servant to the lender, so free yourself today!

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