The buzzword in today’s world where economic downturn has hit both the poor and rich is ‘belt tightening.” Ann Marosy says that the two key traits of people who do not become wealthy, firstly, tend to spend all of the money they have and, secondly, they do not know what they spend their money on.
Ric Edelman, author of The Truth About Money and Ordinary People, Extraordinary Wealth, calls this “spending unconsciously”. He says the reason why people spend without giving it much thought is they have no goals.
Without goals, we live unconsciously from moment to moment, we never plan for the future, we spend all of our money, and as a result, we are unlikely to ever become wealthy. One way of spending consciously is keeping your fixed costs in check.
Fixed Costs are your essential costs that are known and have to be paid on a regular basis like rent, electricity and water bills, phone bills, loan repayments, school fees etc.
These costs are usually determined by your lifestyle choices, the size and cost of your house, cars and major possessions, and therefore difficult to change without making major adjustments to the way you live
Marosy’s theory is that the easiest way for someone to know if they are living within their means is by determining one’s fixed costs. If you are experiencing severe financial hardship, your monthly fixed costs are higher than 65% of your net income.
That means that you badly need to have a debt repayment plan which may include debt consolidation in order to reduce that fixed costs burden.
On the other hand it could be a sign of very little income which implies that one should re-examine your income sources and find logical ways of increasing it.
If you live from one salary to the other and seem to be going from one financial problem to the next, you tend to have fixed costs from 45% to 60% of your income.
If you have fixed costs of 40% then your financially healthy and if the costs are below then you are deemed to have excess finances to save and invest (in that order), they are living comfortably within their means, and if their fixed costs are below 40%.
Therefore, if you want to reduce financial strain and accelerate your wealth, keep your fixed costs well below the 40% mark and invest the surplus.
As a result you can comfortably live within your means and achieve your short term, medium and long term financial goals as well.