It’s a rule of thumb that you should not spend more than you earn. This is normally excellent advice. If you overspend relative to your income you can easily find yourself in a world of pain.
But sometimes overspending is actually smart. In fact there are 5 situations where shelling out more than you bring in is a brilliant move. Let’s explore this together.
It can be smart to take a big cut in pay if it significantly and clearly opens doors down the road that are otherwise unavailable. This can be a brilliant step especially if you feel stuck in your current job and really need to make a change. Of course if you take the pay cut, you might have to spend more than is coming in but so what?
Depending on how temporary the situation is, that’s no problem. This is a good move if you:
a. Make sure the odds of earning more money in a short time are highly in your favor.
b. Make sure you understand how long it will take for this move to pay off.
c. You have a game plan. If you can’t finance your family during the lag time, earmark spending cuts and be ready to implement those reductions at the appropriate time.
The key point is that taking a pay cut can be a shrewd move if the outcome is almost guaranteed within a reasonable time frame. But don’t go for it if your boss talks about promotions and raises in vague and uncertain terms. The risks of taking a pay cut in exchange for a maybe are too high.
Generally speaking, spending more on lifestyle than you earn is “no bueno”. But there are even times when spending money to have fun makes sense – even if it’s a little outside your budget.
2. No Choice.
Sometimes the only way to keep your job is to take a dramatic pay cut. I get that. Since you have no choice, you have no choice. Go for it. But keep in mind that if your firm is undergoing financial difficulties, it doesn’t bode well for the future.
Still, you don’t have to panic. You just need to get into action on two items muy pronto.
a. Cut your spending down to match the reduced income.
b. Start looking for a better career opportunity immediately.
It’s much easier to find a job while you have a job. So refrain from reacting emotionally to what is absolutely a very emotional trigger. Keep your head and get to work. Start looking for a new place to hang your hat ASAP.
3. Save Time
Does it pay to take technical training that helps you get ahead? Let’s say you really want a promotion and you figure you have two options. First, you can stay on your job and try to work your way up. You figure it will take 2 years before you get the new position.
Your second option is to get a loan and pay for some training classes at night. You estimate that by taking option 2, it will only take one year to get promoted. If the courses cost you $3000 but you’ll earn an extra $10,000 and do so 1 year faster, it really pays to get this training. That’s true even if you have to go into debt to do so.
Neal’s Notes: You can go through this same evaluation process when considering to borrow or pay cash for an investment or major purchase. It’s not always such as clear cut decision.
4. Starting A Business
It’s not unusual for people to see their person income plummet when they first start their business. This is almost unavoidable because it takes time to first understand and then establish the business.
Because many business owners don’t set aside enough cash to get them through the lean times, they often find themselves between a rock and a hard place. And this lack of cash flow is the #1 reason why most new businesses fail.
When I first started my business I took that risk without even realizing what I was doing. When I became self-employed I only had enough money set aside to support my family for 3 months. Worse, I had no idea how long it would take to make money in my business or how much I’d probably bring home. Fortunately, it all worked out but there were plenty of sleepless nights and anxious days.
The positive side of this was that I worked like a horse during the first several years just to stay afloat. The downside was that I was constantly worrying and afraid. It wasn’t a lot of fun.
If you are starting a business, don’t repeat my mistake. Carefully plan out how long it will take to start making money, how much money you need to make and where the short-fall is going to come from during the ramp up period.
The thought of withdrawing more money than you earn strikes fear into most retirees. Believe it or not, this can actually be a very clever tactic. The best way to explain this is by way of example.
Let’s say you are 60 years old and want your assets to last at least until you are 95. When you push the numbers, you realize that the interest you can earn won’t yield enough to cover your cost of living. As a result, you decide to annuitize your nest egg. That simply means you with draw the earnings plus a little principal each month. If you plan it wisely, you can possibly create twice as much income as compared to just withdrawing the interest only.
On the face of it, most people dismiss the idea of spending more than they have coming in. But if you are mindful about the balance between assets, income and spending, you can spend more than you are bringing in and it can add a lot to your life.
Can you see yourself spending more than you have coming in? Under which circumstances?