Greetings from California! This has been a big week: I had dinner with my biological sister, whom I haven’t seen in 7 years. (I was adopted.)
She lives in Amsterdam, in the Netherlands, and I tried (unsuccessfully) to visit her during my recent three-week trip to Paris. But the universe decided that we should reunite in the San Francisco Bay Area, instead. So here we are.
I was nervous that we might not have anything to talk about – I imagined us sitting across the table, staring at each other, saying “Uh … so I hear we share the same DNA?” – but of course it was like reuniting with an old best friend. Next summer I’ll probably jet over to Amsterdam to hang out with her more.
But this isn’t a blog post about family reunions. It’s a post about how many opportunities are open if you have this magical thing called discretionary income, the thing that lets me visit my family in any corner of the globe without blinking an eye.
Wealth is measured by discretionary income, not raw income. A person who earns $8,000 per month but “needs” $8,001 to pay her self-imposed bills is in a worse financial position than the person who earns $2,500 but needs only $1,500.
Based on this Afford Anything definition of wealth, most people are poor, even those with six-figure salaries. Most people abuse credit cards and car loans and too-high mortgages, trapping themselves in huge obligation loads and forcing their cost-of-living to spiral beyond control.
Then when an opportunity of a lifetime leaps in front of their eyes, they’re forced to quietly say no. They become their own jailers.
You don’t need a million dollars to be wealthy. You simply need to reduce your necessities so that you have gallons of discretionary money.
Amplifying Your Discretionary Income
Beyond a certain bare-minimum baseline of needed spending, everything else is discretionary. And you might be shocked to find how little money you truly “need.”
That baseline, I believe, is about $12,000 annually for a single person living in the U.S., or about $1,000 per month. That’s the least amount of money that a person can comfortably live on (though I’m sure there are stories of people living on less.)
During my college years, I lived on $1,000 per month, which consisted of:
$400 – rent, including all utilities
$200 – groceries
$100 – health insurance
$50 – basic cell phone
$250 – miscellaneous everything else (toothpaste, sunblock, thrift-store clothes)
I didn’t own a car, home, or pets. I didn’t get fancy haircuts or drink lattes.
I wanted some of these things, of course. I especially missed having pets and plants. But I knew that these are discretionary purchases, and I chose not to partake in them.
Every $1 that I spent on gasoline or property taxes or an overpriced haircut would be $1 less that I could spend on my true passion, world travel. After a few years of this lifestyle, I had saved enough to quit my 9-to-5 and jet around the globe.
Most people would say that owning a home, owning a car or buying brand-new clothes is a necessity. I believe they’re wrong.
You can increase your options in life by radically redefining “necessity.”
You Can Live on Less Than You Think
Do I want to live the same lifestyle today? No. These days I dine at sushi restaurants, I nurture a flower garden (the ultimate luxury – you can’t even harvest your crop!), I have two cats who need litter and food. I get my hair highlighted, subscribe to Netflix, and belong to a yoga studio.
Most people think of this as “normal” or, worse yet, conceptualize these expenses as “necessities.” But face the facts: this is ALL discretionary spending, every last dime of it.
Clothes? Discretionary. Cat food? Discretionary. Cell phone? Discretionary.
There’s nothing wrong with consciously choosing to spend your money in this manner (assuming you’re maxing out your retirement accounts and you have no consumer debt). But you MUST recognize it for what it is: luxurious discretionary spending, which comes at the cost of making trade-offs against other alternatives.
The vast majority of us spend most of our money on discretionary purchases. We just don’t realize that those purchases are discretionary. We’ve come to think of them as “normal.”
They’re not normal. They’re luxuries. Yes, everyone else is spending their money in that manner, but everyone else is broke.
To maximize your discretionary income, thereby living like you’re rich, reject the purchases that are “normal.” Shift your money towards the purchases that you truly want. Radically redefine “necessity.” You can live on less than you think.