Most personal finance bloggers extol the virtues of frugality and I’m normally among them. It’s true. People generally get wealthy (and more importantly stay wealthy) because they learn to live well below their means. But sometimes, personal deficit spending makes a lot of sense. That’s right; I’m saying sometimes it actually pays to spend more than you earn.
Now before you get too excited, let me be very clear: the circumstances when this works are very specific. Don’t take this as license to run up your credit cards on a first-class trip to Backwater Nowhere-ville.
Those rare instances when deficit spending do make sense are when you have a unique and very attractive opportunity to invest in yourself. Although, in most cases, the duration of your deficit spending will be very limited.
Let’s take a look at three of the best opportunities available.
Business
I love being in business for myself and I love talking about small business ideas. Being in business for yourself gives you tremendous freedom and artistic license to be creative. It’s also the best way I know to be financially successful.
But when you are just starting out, you may have to spend more than you take in. That may be unavoidable.
Please don’t misunderstand me; I don’t believe you should open up your shop at all costs, or that you do so without creating a solid business plan. If you go this route, make sure your business plan spells out exactly how long you expect this deficit to continue and for what reasons. Make sure you also have the working capital to tide you over until the situation turns around. And just in case, plan for that negative cash flow to be twice as long as you think it will be. Finally, before you embark on this adventure, be willing to close shop if your plan doesn’t work out in a reasonable and agreed upon time.
Overall, I do not suggest that you throw a lot of money into a business if you can avoid doing so. But if you can ease your way into a business it might be a golden opportunity. If that means you earn less for some period of time, so be it. You only live once and if you have the dream of being self-employed, earning a little less money now could be the way to go.
Travel
Let’s continue with the life-is-not-a-dress-rehearsal theme. No matter what your age is, if you dream of traveling you should find a way to do it. Make a plan and don’t restrain yourself out of fear.
My friend’s daughter is going to graduate college in 18 months. There is a great company that is interested in hiring her now as an intern with the understanding that she’ll come to work for them when she graduates. This would be terrific for her career, but not so good for her because her plan has always been to travel after she graduates.
She’s saved up for her trip but, of course, she won’t make any money while she’s on the road.
At the end of the day, she told the firm that offered her the internship that she wanted to travel after graduating college — so they ended up hiring someone else.
That employer lost out if you ask me. She’s got her dream and kept her integrity. Sure it will cost her some money and she’ll be in deficit mode for a while but who cares? She’s got plenty of time to make up for it.
Another young man I met joined the Navy after he finished high-school because that was his dream. He wasn’t really interested in college at all. So what? Like my friend’s daughter, he had a plan and he is now living his dream. If he leaves the Service, he might decide to go to college. But he can also find great jobs without a college degree if he is still of the mind that school is not for him.
Some opportunities are rare and when they come along you should take them. Having said that, even if you love to travel, there comes a time when you must lay down roots if you want to have a secure future. If you find yourself continually taking advantage of opportunities to travel, you are probably not considering the tradeoffs adequately.
Lifestyle
Most people who are in a financial rut are there precisely because they overspend on their lifestyle. Nevertheless, this Certified Financial Planner is telling you there are unique instances where you should overspend on lifestyle.
So when is it okay to deficit spend on your lifestyle?
I’ll get to that, but first it’s important to understand the relationship between your assets and income. Many people don’t have a financial plan and, as a result, they simply spend whatever they have coming in. On the face of it, this looks like a sound approach. But if you have significant assets and fail to tap into them, that could be a needless mistake.
For example, I met with a man last week who was living far more modestly than he had to. He had pension and social security income that totaled about $3000 a month — but he also had retirement investments that totaled over $500,000 and he completely overlooked those assets as a resource for more income. At the end of the day, this person was able to generate an additional $1500 a month in income without breaking a sweat.
Deficit spending, done right, will give you more life. Of course, if you do this incorrectly, you’re going to be in trouble.
The core message is to be mindful about your spending and have a plan no matter what.
About the Author: Neal Frankle is a CFP in Los Angeles and the owner of Wealth Pilgrim.
Photo Credit: Images_of_Money
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