There is a character in Charles Dickens's famous novel David Copperfield who came to realize the secret to financial success and happiness. The character is Wilkins Micawber who spoke the famous lines while being dragged away to debtor's prison. It is referred to as the Micawber Principle: "Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
Micawber is referring to the British currency of his day - the pound. The explanation? Living within your means brings happiness. Living above your income brings misery. Over ten years ago, we found ourselves in a similar situation. After taking a job on night shift at my company, I received special bonuses tied to night shift work, a sizable bump in my salary. It enabled us to get a home and live more comfortably. After several years of working the graveyard shift, and the arrival of children, the schedule no longer worked for us as. So, I returned to a day shift and lost the bonuses. We found ourselves on the downside of Micawber's Principle. Our expenses exceeded our income. Each month, we had to dip into savings to make ends meet. We realized that the home we purchased was not affordable on the reduced salary. What to do?
We applied these three fundamental principles of prioritizing expenses:
Live on 50 percent of your income
Life is a series of choices. Choosing to live beneath your means is possible. We recognized that if we stayed in the home we bought, it would take decades to reach this goal. So we decided to move, then relocated to another city where I could continue to work for my employer, but at a much lower cost. Now, our bills are currently 48 percent of our income. We analyzed every expense (groceries, fuel, insurance, mortgage, etc.) and made decisions on how much we would spend on each. It meant less eating out, fewer vacations, and smaller holiday spending.
Save 40 percent of your income
Putting aside money for the proverbial rainy day is also a choice. We do this several ways. One is participating fully in my employer's 401K program. Another is setting aside money now to help pay for our kids' college, and for future expenses (like weddings). We do not touch this money, and the principle of compounding interest works for us. By saving each month, we have built a reserve in case financial troubles come (replacing vehicles or appliances). We never purchase anything with a credit card that we do not pay off the same month. Banks pay us interest, not the other way around.
Give away 10 percent of your income
It is important to be generous and help others. Whether you donate to charities or church, giving to others always feels good. We contribute 10 percent to our church and to other good causes. We have found that the more we give, the more we earn. Strange but true.
Ten years ago, we solved our financial problems after making a single big decision (moving), then by making smaller decisions day-to-day to live within our means every month. As a result, we have money saved for retirement, we have saved enough to purchase all of our vehicles with cash, and we have saved for the kids' futures, as well. While it was difficult watching friends and acquaintances travel or decorate their homes, our past decisions have resulted in many long-term benefits we enjoy today.
In contrast to the Micawber Principle, there is also the Bolkiah Principle. I name this after the infamous Prince of Brunei, Jefri Bolkiah, who embezzled and squandered billions of dollars on luxury items such as sports cars, planes, hotels, and jewelry. When I first heard his story, what struck me is there seemed to be no limit to the amount of money that would satisfy the Prince's desire to spend. With nearly unlimited resources, he spent it all on things that could not satisfy him. It is the Bolkiah Principle that makes someone spend more than they earn. Our purchases are all choices. By choosing to live Micawber's Principle instead of the Bolkiah Principle, our family has found more financial freedom and peace of mind during difficult economic times.
