Money lesson 1: Live within your means. There are two ways to do that.

photo-314It’s money week on the blog, with an emphasis on money lessons I’d like to pass along to my kids. Of the various financial advice out there, what do I think is most important?

I’ve been pondering this, and I do keep coming back to the oft-repeated wisdom of living within your means. As long as you have at least a mid-level income, if you live within your means, you can build up wealth. Build up wealth, and you gain more control over your life. Live paycheck to paycheck, which you can do on surprisingly large incomes, and your choices are more constrained.

Of course, financial shocks can happen to anyone. There are reasons people spend more than they bring in, some good and some bad. Arranging your basic expenditures to be less than your income, however, can over time give you some slack to deal with emergencies.

This is all basic financial stuff. What I think gets talked about less often is that there are two ways to change the equation so that you live within your means. One is to spend less. The other is to earn more.

Spending less is the more straightforward tactic, so it’s the subject of most personal finance literature. You can do it immediately. There are established ways to spend less at the grocery store. If you have a restaurant dining or take-out habit, doing this less frequently will likely save you cash. You can use hand-me-downs and repair clothes rather than automatically buying new stuff. Changing the thermostat can change the volume of money going out the door.

Earning more is more complicated. Many jobs don’t allow for immediate boosts in pay beyond a 3-5% raise (or maybe more if you are getting promoted). The best time to consider this question of how much you will earn is when you’re choosing your profession, and most people aren’t looking at personal finance literature right at that point. That’s why it’s not aimed at this audience. But money is going to wind up mattering in a way that many early-20 somethings don’t necessarily think about. One can be far more relaxed about life knowing that, if the heater breaks, you’ll be able to replace it quickly.

I don’t think one should choose a profession solely for the compensation. Such is the road to misery, or bitterness when the compensation structure changes (which it could, due to new regulations, new competition, etc.) However, it’s also good to avoid either/or thinking. Generally, the choice is not between doing what you love and getting paid very little, or selling your soul to the devil for a high paycheck. What I found from writing I Know How She Does It is that many high paying jobs involve interesting work, a lot of autonomy, and a surprising amount of flexibility.

So I definitely want to have discussions with my kids about the various jobs out there and how people get them. However, even after one goes down a certain professional road, the income picture isn’t totally fixed. Over time, there are various ways that one can still change this side of the financial equation.

One is looking at how many adult family members are in the workforce and for how many hours. There are many reasons to stay home with kids, but it is a choice with a huge financial consequence, not just in years of foregone income, but in reduced earning power for the rest of one’s life (Sylvia Ann Hewlett’s calculation was 37% gone for 3 years out — and that wouldn’t even get us to where two kids were in school).

While changing professions is hard, there are also reasonable ranges within most professions. There’s lots of literature about establishing one’s personal brand, and Dorie Clark has a great new book out next week, called Stand Out, about finding one’s breakthrough idea and building a following around it. If you become known as a thought leader in a space, you can write articles or books or give talks or consult or whatever as ways to expand your influence and income. You will be more in demand, and can better dictate employment terms.

This provides a segue (I now know how to say that word!) into the next way to boost income: a side gig. If your first job doesn’t forbid it (some do), you can try to start some sort of artisanal business on the side. Maybe it’s something you have a passion for: blogging, crafting, playing your instrument at weddings. Or you can structure your life to devote more time to the passion and figure out how to earn a lot in short periods of time doing other things. You work on your experimental novels from 8 a.m. to noon, break for lunch, spend an hour on your lifestyle blog that’s building up a platform (and bringing in affiliate income) and then spend the hours of 2 p.m. to 5 p.m. cranking out corporate white papers or using tech skills if you have them, and the like.

As a side note, if you live within your means, hopefully you’ll start investing some of your income. Then those investments will create income too. The concept of dividends still kind of blows my mind.

Again, this is all less straightforward than shopping clearance sales, but the numbers can be quite different. If you earn an extra $6000 a year, that’s $500/month. Even after taxes, it takes quite a few coupons to equal that. There’s ultimately a limit to how much you can cut. In theory, there’s no limit to how much you can earn. In reality, there is. But there’s often some option to boost income over time if it’s a family priority.

Have you ever cut the spending side, or boosted your income? Or both?

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