My wife and I don’t make a lot of money. We both have liberal arts degrees and work for non-profit organizations. While we may enjoy what we do during the day, we have come to understand that neither one of us will likely make a 6-figure salary. That’s okay by us because we are still able to save money each year. In the past year, we were able to grow net worth and save nearly 40% of our income.
Too often I hear my friends and colleagues complain about how they don’t make enough money. While this may be true, the secret to financial success is not to earn more money each year, but to learn to thrive on a small salary. Despite not even making close to $100,000 combined last year, we were able to significantly improve our financial situation while paying for graduate school AND living in one of the most expensive regions in the country. While I don’t have a magical formula, I have learned several things that have allowed us to prosper on a small salary.
Step 1 – Control Your Spending
This may sound simple, but it’s far from it. When my wife and I were just married (and making even less money), we were barely making ends meet. Without exaggeration, we earned an average of $200 above and beyond our normal mandatory expenses (with budgeting $300 for groceries). This meant that if we went out to eat and spent $40 in one night, we had $160 left for our discretionary fund. While I don’t miss these days, I am glad that we went through this because it taught us an invaluable lesson of how to control our spending. If you realize that a high salary is not in your immediate future, one of the few options that you have for financial success is lowering your expenses. It really is that simple.
Step 2 – Use Credit Cards for Most Purchases
While not the typical advice for low-income earners, my next basic advice is to use credit cards for most, if not all of your purchases. My wife and I started using credit cards during college and we couldn’t have imagined the huge benefits of doing so. Not only do we earn about $500 each year by buying things that we would normally buy anyways, but we also are building up our credit score. Our credit score will be helpful in a couple years to get a lower interest rate on our mortgage (saving us even more money). Last but not least, it also provides us protection if anyone were to get our information. Any unauthorized charge would be inspected by a fraud team at the credit card companies. This doesn’t mean that I don’t keep a close eye on all charges, but it does provide me a little more reassurance than if I were using a debit card (which doesn’t offer the same protection).
Step 3 – Start Investing (even if it’s only a little)
The next thing you have to realize is that the only way that you will be able to retire is if you start investing now. Without a lot of money to invest, the only other thing that you have to your advantage is time. The younger that you are, the more time you have for compound interest to do it’s thing. The best thing that you can do is to use a tax-advantaged account like a 401(k) or Roth IRA. Even if you don’t know which individual stocks to buy, you can always start with target date retirement funds that will reallocate your portfolio as the years go by. All you need to do is to invest the money regularly.
Step 4 – Earn a Little Extra
Last, and only last, should you focus on increasing your income. Last year, my wife and I focused on earning a little extra and it helped out a lot. Since we had already been spending less than we were earning, we were able to invest every extra dollar that we made. Instead of making money first and blowing it on a quick thrill, we already had our financial priorities established. I’m convinced that this is better than a high income immediately after graduating from college.
Achieving financial success is not as simple as earning a lot of money. It’s all about surviving with what you do have. My wife and I learned this over the past years and I couldn’t be happier. By making these small sacrifices, we can continue to work jobs that are meaningful to us and avoid selling out to the highest bidder (aka employer).
This post was written by Corey from 20’s Finances.
Definitely start early, even if it’s a little. We just turned 30, and I can’t believe that our Roth IRA accounts are worth $100K. If we add the max Roth IRA contributions to them for the next 5-6 years, and then just let the account sit until we’re 60 it’ll have almost a million bucks in it. Not bad for not touching it for 30 years.
But it’s because we started early. $1000 or $2000 deposited when we were 22, then 23, and increasing it to the max $5000 (now $5500 for 2013).
I can’t think of anything to add! I think you’ve covered the four steps that anyone should be following to live within their means and build up a nest egg. I agree with the credit cards and do it myself. If you have the discipline to use the card for regular expenses and pay it off regularly, you should get the benefit of points or cash back. It’s free money, and non taxable at that!
LOVE this post! It is definitely possible to be able to live a full and rich life while on a small salary. We are working on increasing our extra income, and love it.
This is a great way of becoming financially independent. I’m a huge advocate of saving.
My wife and I use the credit card to buy a lot fo things. There’s rewards to get and so long as we pay it off each month, it’s ddefintely worth it! It’s free money! So I always cringe a bit when I see pf bloggers say ‘no credit cards’ across the board.
When I moved to Canada we weren’t making near 100k a year combined and we managed to sock away loads of money just by spending less than we earned. I do think we should aim to improve our salary any way we can such as promotions, further education, moving to a better paying roll but spending less is always the top priority. We have used credit cards for ages now and paid them in full each month, great tip as long as it’s paid in full. The rewards have been a lovely perk. We both started investing young although we hope to contribute more starting in 2013. Sometimes people think in order to have it all you need to make 6 figures.. sure you can get all the fancy toys but those are short lived. Life goes on… Great post.
I like how you went against the grain with using your credit card for every purchase. People forget about the cash back. It is a nice little bonus for using your plastic.
Great post Corey! My wife and I were in this very situation in the early years of our marriage and while it is difficult, it CAN be done. I love the start now standpoint. That holds a lot of people back. Even if it’s only $25/$50 per month, start now and you’ll establish that discipline plus have more time for it to grow.
Yes, yes! I completely agree with using credit cards for purchases. If you’re worried about the temptation to overspend on them, lower your credit limit.
One more thing I would add is to purchase quality items and take care of them. We cannot afford to replace anything frequently, so we save up for brands and models (of everything) that have the best reputations. And then we take good care of what we do own, so that we don’t need to buy replacements because of user error. This goes for everything from our clothing to our cars and whatever is in between.
Corey,
It’s all about living below your means. I’ve had roommates since I’ve graduated college and even lived in a sunroom. I’ve also capitalized on cash back rewards from my credit cards. Most of all, I’ve kept my monthly expenses down by not having a fancy phone, car or means of entertainment.
-Christian L. @ Smart Military Money
Your story reminds me of me. Although my wife and I did not work for non profits, we did not make a lot when we started. We saved and bought our first house when I was 27 in Los Angeles. I bought my first apartment building 4 years later and it took off from there. Savbing and investing is the key to wealth.
Good advice. I would add not to waste your time when you start looking at how to earn more income. I have a lot of little side-hustles I’ve accumulated and I am realizing they are more time than they’re worth. I need to consolidate and consider my time as my greatest asset.
Great post. I also have an arts degree and have worked for non-profits before and although the work is fulfilling you don’t make a lot of money. But that doesn’t mean you have to be poor for the rest of your life, you just have to be smart about it.
Great post Corey, you don’t need tons of money to live a comfortable life. I was able to leave the corporate world at 29 after working only normal job at normal wages, the secret is simply to live the life you can afford!
Starting to save early is so important. I’ve gotten a little later start then I would have wanted because I had to pay off my student loans first, but I’m trying to get back on track quickly.
Great post! My fiance and I are living on a very modest income right now, and we’ve definitely learned how to prosper on it. We only spend about half of our take home pay, the rest is going towards paying off my student loans. We’re going to be very careful about lifestyle inflation as I start to earn more, so that we can invest the difference.
Very wonderful suggestions. A salary, may it be big or small, is nothing if not handled properly.
Great post, I always use Credit Cards for my purchases, especially with an incentive of cash back or air miles towards my next big flight… thinking Seychelles this year!!
Loved your advice on using credit cards. Most financial counselors tell you to cut them up to control spending. I find that using a credit card for ALL my spending has the extra benefit of providing a basic budget that helps me see where I’m spending too much. That and the credit score boost can be especially important to newlyweds like my daughter. Good advice, thanks!