“Annual income twenty pounds,
annual expenditure nineteen pounds nineteen and six,
Annual income twenty pounds,
annual expenditure twenty pounds nought and six,
result misery.” – Charles Dickens
In an earlier blog post, I identified a growing financial margin as one of my personal indicators of stellar financial performance. In simple terms, margin is the difference between your income and your expenses. It is a good measure of financial progress because it indicates how much your income outpaces your living expenses.
INCOME less EXPENSES = MARGIN
Living with little to no financial margin leads to running from one money emergency to the next. A negative or even shrinking margin is also troubling. A desirable outcome is to have a positive and growing margin. I will expand on the benefits of having a healthy financial margin later in this post.
The challenge of maintaining a positive margin is not one that only low income earners grapple with. Even high earners such as celebrities and athletes must be careful to maintain a positive margin. As several well documented bankruptcy cases have shown, even the affluent must respect the laws of margin or end up in financial disarray.
One major deterrent to creating and maintaining margin in your financial life is lifestyle creep. Also known as lifestyle inflation, it is the endless desire for more stuff, an insatiable desire to upgrade your lifestyle and burnish an image of success. According to Investopedia, “as lifestyle creep occurs, and more money is spent on lifestyle, former luxuries are now considered necessities.”
Living with margin has a number of invaluable benefits:
Positions you to lead a life of generosity. With financial margin, you are well placed to do a wealth of good in the world. As Churchill said, “we make a living by what we get. We make a life by what we give.”
You are able to make money work for you rather than just working for money. The “surplus money” not tied down in present consumption can be invested to generate additional returns.
Paves the way to financial freedom. Habitually living below your income and investing the surplus wisely leads to financial freedom. Living with margin could make the difference between retiring when you want to and having to continue working when you’d rather be retired.
Fosters financial peace. Money worries can lead to serious health and psychological issues. A positive, growing financial margin can boost emotional well-being. Margin provides much needed cushion against financial crisis.
Enables more cordial relationships. Pocketbook issues are a leading cause of strained relationships. Maintaining a good handle on your finances can help preserve your most valued relationships.
There are two primary levers available to pull in order to improve your margin. You could increase your income or lower your expenses. If fortunate, you may be able to pull both levers simultaneously. That said, for most people, pulling the expense lever is more readily within their control. Here’s how to pull that expense lever effectively:
Define (or refine) your values. Order your life and money decisions based on what you value. If financial stability and security are important to you, then living with margin is the reasonable lifestyle choice to make.
Do the math. How large is your financial margin in a typical month? Is your margin trending up or down? Take the guesswork out of the equation by doing the math. You can’t control your expenses if you don’t have a firm handle on how much you actually spend. Start with the big ticket items such as housing and transportation. Pay attention to the smaller items as well because they could quickly add up.
Draw the line. Ask yourself “when is enough, enough?” A perpetual chase after the next shiny object – a bigger house, newer car, more luxurious vacation and so on – will leave you unable to maintain a healthy financial margin.
Put a ceiling on your spending. To create more margin in your life, put a ceiling on your spending. It could be a percentage ceiling e.g. I live off 80% of my income or a dollar limit e.g. spend no more than $2,000 on family vacation every year.
Find an accountability partner. Friends don’t let friends do dumb things with money. Living an overextended life in which your money outflow exceeds your inflow ranks high up there on the list of financial pitfalls to avoid. Identify a trustworthy friend that can help keep you honest as you seek to create and maintain a healthy financial margin.