The Real Secret to Achieving Financial Freedom on a Modest Income

Earlier this summer my teenage son revealed to me and the Honeybee that he has a girlfriend. Yes, it’s his first one.

And as every guy who has ever dared to play the game of love knows, courting the fairer sex requires a suitor to spend a little cash on his girl now and then. At least it does for those who want to get to second base.

Now that my son has a girlfriend, I’ve noticed that he is still spending his money as fast as he earns it. Just not on her.

Apparently he hasn’t got the memo yet.

That’s right. My son has been “dating” his girlfriend for about four months, but he has yet to treat her to so much as a trip to the ice cream shop down the street.

To be fair, neither girls or saving money seem to be at the top of Matthew’s priority list right now, which is why he chooses to spend all his money on more important things. Like himself.

Well, at least that’s how it is for now. But if Matthew continues to choose that inglorious path, I strongly suspect I’m absolutely certain his love life — along with his personal finances — will slowly but surely begin to take a turn for the worse.

Come on, ladies; you know it’s true.

Managing Personal Finances Is All About Choices Too

Our position in life at any place in time is ultimately determined by a long series of decisions that have been made over the course of our lives. As we become adults, a lot of those decisions involve the management of our personal finances.

Earlier this week I got a comment from a reader who disagreed with my claim that an annual income of $40,000 is enough moneyfor a single person to live on fairly comfortably — or something very close to that — even after considering payroll and income taxes.

As proof, he used himself as an example; even though he earned $38,000 annually from his employer, he still had to work on the side, grow his own vegetables, and rent out his basement in order to make ends meet.

The reader was convinced that the primary reason he couldn’t meet his obligations was because his salary was too low; most folks in his predicament come to the same conclusion.

In most cases, however, the real reason people find themselves in dire financial straits is simply because they end up making a long series of poor choices — choices much more critical than credit or debit.

It happens all the time. People get married and have too many kids too early. They buy bigger homes than they can afford. They spend beyond their means and run up their credit cards.

There are countless examples of people making less than $40,000 per year who swear they’re struggling despite cutting their expenses to the bone — all the while overlooking the fact that they spend $50 per week or more on lottery tickets, or one of the other four horsemen of personal finance.

I know one person who pulls down well over $100,000 annually who also complains, without the slightest hint of irony, that his money troubles are a direct result of inadequate income. You know the type. This guy complains about his inability to make the mortgage payment even though he’s got a pair of new luxury cars sitting in the driveway that he purchased within the last two years.

It’s hard to spend less than you earn when you can’t tell the difference between a want and a need, when you can’t control your urge for instant gratification, or when you can’t understand why you’re better off driving a humble sedan instead of a flashy new Infiniti while you’re earning a modest income.

If you intend to successfully manage your personal finances, you have to make more right choices than wrong ones over the long march of time.

Do that, and you’ll most likely find it’s possible to make ends meet no matter what your income is.

Photo Credit: Stefan Andrej Shambora

(This is an updated version of an article originally posted on 4 October 2011.)


  1. 1

    pen says

    well, i hope your son can improve both his spending habits and his love life soon. tell the guy who can’t make it on 40k that you have at least one (single, no kids) reader who is more or less surviving on less then 20k.

    • 2

      Len Penzo says

      My fingers are crossed, pen. I really hope Matthew will improve his spending habits too. At 14, he’s still got a few years to figure things out.

  2. 3

    Olivia says

    Don’t we wish we could just pour all of our adult hard knock learning directly into our kids’ brains? Sigh.

    • 4

      Len Penzo says

      Yes, I do, Olivia. I also wish my folks could have poured all their hard knock experience into my brain when I was a teenager. Actually, they tried, but on some decisions, I was too stubborn to listen.

  3. 5

    tracee says

    oh man, matthew will learn. i hate when people whine about money but then take trips to the islands, buy new cars, have the newest iphones and go out to dinner every night. then they wonder why i look at them when they’re stupid when they ask me to “front them 50 bucks.” jerks, they make twice as much as me and have no kids. you’re a very patient man to listen to them whine, i can’t handle it.

    • 6

      Len Penzo says

      I usually just nod my head, although I’ve been tempted at times to make some unsolicited suggestions. Of course, I’d never be crazy enough to follow through on that. The conversation would probably get very ugly if I did!

  4. 7

    Lisa says

    I have a coworker who is at the same salary level as me, and constantly complains that she NEEDS to get promoted cause she can’t live on what she makes. Yet, she lives in a 2 bedroom condo-by herself! She has the newest, most up-to-date gadgets and insists that they are needs. She was talking the other day about how she just had to have the Kindle Fire because then she wouldn’t have to drag her laptop around her apartment with her. I suspect this laziness is also why she’s overweight and doesn’t understand why she can’t lose weight!

    • 10

      Len Penzo says

      I know, Bret. It’s definitely not easy. And depending on how big your family and where you live, it could be a relatively spartan lifestyle. But it can be done. No doubt about it.

  5. 11


    When I started dating, I had no money. I found ways to spend very little and still have agood time. It stuck with me and I think it is why I can stretch my money so well.

    • 12

      Len Penzo says

      Oh, I know, KC. There are lots of fun ways to have fun on a date without spending a lot of money. (No, I’m not talking about THAT, folks.)

  6. 13

    Liz says

    I have to say that when I read at your original living on $40k a year article, I thought that your calculations actually worked AGAINST your argument on how this was easily doable. Reason being that you didn’t include adequate retirement or emergency funds, and didn’t even mention replacement costs of the vehicles. I wouldn’t really consider someone ‘making it’ without building retirement/savings accounts, from the beginning. Otherwise, they’re just one lost job/old car away from everything going down the tubes.

    Your calculations looked to be at least $5k short, and that is assuming good health insurance and 5% employer match on retirement accounts. Maybe you could make up this amount (+ taxes) through being more frugal on groceries and such, but there’s not nearly as much slack as you make there out to be.

    I agree that there are an awful lot of people out there who could tighten their belts a bit more if they had too (and I include myself in that mix), but your math is not at all convincing me that all families struggling to live on $40k per year have “no one to blame but themselves.”

    • 14

      Len Penzo says

      Hi, Liz. Thanks for your comments.

      Remember, those calculations leave a lot of room for padding, as they were based on my household expenses with an income far above $40,000. For example, I am certain I could cut my grocery bill by $5000. I could also cut my utilities and gasoline bill, which would free up another $1500 or so. That brings my expenses down to under $20,000 — and that’s living in Southern California. Assuming taxes eat $10,000 (which is conservative, probably less than that) that gives me $10,000 to devote to healthcare (keeping in mind that I had already allocated over $3000 to healthcare in my original estimate), retirement, and other stuff. So I think I’ve made my case. But maybe I’m biased. 😉

      • 15

        Liz says

        Thanks for responding! It’s good to read your feedback :), even though I will note that the extra $10k you’re describing as available for health care was already budgeted for housing expenses in the original post.

        I still don’t find the numbers convincing, I have to say. At the risk of being slightly obnoxious, here’s another look at the budget for this hypothetical urban family of 4.

        Original expenses = $25,471. After cutting groceries by $5k + another $1500 in cuts. = $18,971
        Note – I think that they could probably cut this category even more by getting rid of the 2nd car and shopping at thrift stores instead of target/kohls. Unclear if that would be enough.

        Rent = $10,740

        Now, adding in some additional expenses that weren’t calculated in the original post:

        Social Security/Medicare tax (7.65%) = $3060
        Estimated federal income tax = $1,300
        Estimated state income tax = $800 ??
        Retirement (5%, assuming a 5% employer match) = $2000
        Emergency Savings = $2000
        Car Replacement Savings = $1500
        Total ‘extra’= $10660

        Total expenses come out to $40,371, so they’re approximately on budget. However, this is assuming very, very, very good health insurance ($3124 total medical and dental for a family of four!!!!!) and 5% employer match on retirement (to get to 10% savings, my minimum threshhold for ‘making it’).

        I suspect that many folks getting by on $40k don’t have access to this sort of extremely affordable health plan. However, to be fair, if the family breadwinner is working at the sort of job that has great benefits AND a pension, then there would be a good bit more comfort in the budget – for example, one of the other posters noted that her family was making it easily on $40k, but they are living in a relatively affordable part of the country and she specifically highlighted that they had great health benefits from the husband’s employer.

        In summary, I don’t find the numbers to be at all convincing that a typical urban family of four is COMFORTABLY making it on $40k a year – the budget seems to really depend on what additional benefits are associated with that $40k salary. Obviously, in many cases it is possible to ‘get by’ – for the short term at least – but it seems that in many instances, the family would have to make decisions – scrimping on savings, insurance, or health care – that leave them very vulnerable in the medium/long term.

        • 16

          Liz says

          I’ve already written enough, but wanted to add that I actually DO agree with your overall message, that most people can cut out a lot of stuff and make do with a whole lot less than we think that we can. However, there IS a substantial cost to the basic safety net (health insurance, retirement savings, emergency savings, etc), and the consequences of not budgeting for those costs can be catastrophic. As someone who grew up in the Rust Belt at a time when almost every family’s bread winner (including my own father) was laid off for a period of time, it makes me really uncomfortable to see calculations that aren’t explicitly taking those costs into account.

          • 17

            Len Penzo says

            Fair enough, Liz! :-)

            Thanks for taking the time to put together a very nicely articulated semi-counterpoint. :-)

  7. 18

    Kathleen says

    I am not sure about the $40,000.00 figure, although it sounds right to me. What I do know is that my husband and I have been doing much better financially now that we are on a fixed income and making about half of what we did before we retired. We are more careful and make better decisions now. Actually, I am appalled when I consider how much money we spent on things we did not need nor, in some cases, even really want.

    • 19

      Len Penzo says

      Exactly, Kathleen. I am positively certain we can ALL live on a lot less than we currently do — especially if we were forced to because of a job loss, or other financial crisis.

    • 21

      Len Penzo says

      Oh, he reads it, Barb. Just not very often! We’ve already had this discussion, so I’m sure he wouldn’t be too surprised if he stumbles upon it.

  8. 22

    EngineerMom says

    We are a family of 4 (I’m a SAHM with a 3-yr-old and a 2-mo-old). My husband makes $40,000/yr (almost exactly – it’s actually $3333/month before taxes and retirement are taken out).

    We live very comfortably – own our own home, a 4-BR, 1.5BA in a good neighborhood in Cincinnati, have a 2009 Mazda5, put away $300/month for retirement, and $50-$100/month into savings towards a roof and emergency fund.

    We have several things going for us:
    1. Fantastic health insurance. University jobs may not pay well, but the health coverage more than makes up for that.
    2. Family who is willing/able to help us out with travel expenses (both sets of parents live 4+ miles away) and “extras” like a zoo membership as gifts.
    3. Nearby friends with kids the same ages as ours – reduces the need for daycare or preschool, and allows for babysitting swaps.
    4. A neighborhood that we chose to live in specifically because of the library, park, grocery stores, mall, and other amenities within 2 miles (my walking-distance limit).

    • 23

      Len Penzo says

      Thanks for sharing that, EngineerMom, and showing another example of how it can be done! I really appreciate it. :-)

  9. 24

    Andrew says

    One thing that always seems to be forgotten when people talk about how much the live on is the cost of living. Someone above posted a 40k income in Cincinatti. To have an equivalent income in Portland Oregon you would need to have an ~18% (~29% for Seattle, WA) increase in pay – so if you are at home trying to sort this out don’t forget to take that into account. But I like the intent of this post, control your spending before complaining about income. It is amazing how much a few simple things can be done to increase your available cash (i.e. mass transit etc).

    • 25

      Len Penzo says

      Spot on, Andrew. Location and the associated cost of living plays a big role. Of course, where we live is just another choice that we all have to make.

  10. 26


    Wants vs. needs – so hard, yet so simple! I work for a company that writes personal financial eduation books, and wants vs. needs is one thing we always emphasize. People forget that they don’t “need” the latest gadget, the $60 version of something they could get for less, etc. etc. We all need reminders to reconsider our wants and our needs!

    • 27

      Len Penzo says

      The biggest problem I see when it comes to differentiating wants from needs is that people don’t sit down and really reflect on discretionary spending before they pull the trigger. That’s why I encourage everyone to have a strategic household spending plan that details future bigger-ticket discretionary spending and is updated at least once per year. Yes, it’s going to take about an hour of time to put together, but it is SO worth it.

      This can be done for the smaller discretionary stuff “on the spot” by just waiting 24 hours after first laying eyes on something before you finally pull the trigger.

  11. 28

    getagrip says

    My child, a junior in college, is now off our credit card. I figured, based on how we were getting nickeled and dimed, it would take about half a year for them to creep their’s up to the max. Silly me, took a month. My comment when asked how they would pay it, “Welcome to the world of being an adult debt slave. How’s it feel to be the credit card’s b**ch? I told you, I put $X into your account, your work for $Y a month, you can do basic math, figure it out.”

    All the discussions, all the warnings, all the “help” offered and examples provided mean nothing in the end to some kids no matter how much they say they agree with you and how vigorously they nod their heads. Sometimes they have to just sink or swim.

    • 29

      Len Penzo says

      Sometimes it DOES take the pain of going through the financial school of hard knocks before some people get it. However, I’ve also seen folks who refuse to accept that it is THEY who are the ones who spent more than they earned — and all they continue to do is shift the blame for their problems elsewhere. Unfortunately, those folks will NEVER get their financial homes in order until they accept responsibility for their actions.

    • 30

      Matt says

      In my experience, it’s a heck of a lot easier to A) not use credit cards at all, and B) teach your kids from an early age to avoid credit cards, and other debt (except for maybe a reasonable mortgage).

  12. 31

    Pat says

    I have never earned that much money. But I have brought my family up, paid for my house, have a new car, health ins. savings and retirement. No I don’t have all the latest gadgets and see most of them as useless time wasters. I have a good life with plenty of friends and lots to do. No I have not missed out on anything. Sure there are a few things I would like to do but if I really want them I will save for them and cherish them all the more.

    • 32

      Len Penzo says

      Awesome, Pat! It looks like you’ve accomplished quite a bit on even less. Thanks for attesting that it CAN be done.

  13. 33


    I completely agree. People have a hard time categorizing a “want” from a “need.” I’ll admit, I’m one of them. There is a list of things that I could do without (daily Starbucks, eating out once a week, business expenses that really need to be trimmed, etc.), I just choose not to. If it came down to going into debt over it, then I’d ditch them. Thankfully, I haven’t had to make that decision yet. However, I’d probably have a lot more in savings if I could give up my Starbucks. 😉

    • 34

      Len Penzo says

      Jen, I know you could have a lot more in savings if you gave up your Starbucks. However, assuming we’re being sensible and not spending more than we earn, I think we should all be entitled to spend a little of our hard fought earnings for the simple pleasures too. I know you do too!

  14. 35


    Distinguishing between needs and wants is so important. A lot of people aren’t taught the difference because we live in an instant gratification society. When I was growing up my mother would always ask me, “Do you want it, need it, or want to need it?” I try to use that logic when I make decisions financially, now that I am an adult and see how my decisions can effect my money. Best of luck getting your son to understand this! lol

    • 36

      Len Penzo says

      Mother always know s best! Thanks, Rikki, for sharing that. I think I’m going to use that saying on my kids.

  15. 38

    lana says

    I have been a SAHM for going on 20 years. I’m trying to get back into the work force.

    When the kids were little so were the expenses. Now, our budget is shot. We are maintaining cars, insurance, phones, gas, repairs, college, books, parking and minimal entertainment. It would be easy to say have your kids pay for their expenses. But, it has paid off for an excellent scholarship for the eldest. Hopefully the younger will also receive a scholarship.

    I’m hoping my sons can get through college with out any debt and maintain a debt free lifestyle.
    Money management has been taught since day one for them, I wish I could say the same for their friends.

    My husband and I are assisting them, while we also prepare for our future. It is a precarious balance to juggle everything.

    God bless you for trying to teach us all.

    • 39

      Matt says

      College can be expensive, and it isn’t getting any cheaper. Sending your kids to college can take a big, wet bite out of your financial butt-cheek, but there are ways to make the bite a lot smaller.

      As a Marine, I would (and still do) strongly hint to my kids the importance of serving their country. My son joined the Utah National Guard when he was 17, and now his college costs are essentially covered, plus he’s learning to serve others.

      I used the G.I. Bill to pay for my own schooling, and it helped me get quite a ways towards a Bachelor of Science degree, with a Grant here and there to catch the shortfall.

      Lest I be misunderstood, I would never condone sending a kid into (potential) harm’s way just to save a buck or two, but the G.I. Bill is a nice benefit of serving your country.

  16. 40


    My husband and I have been married for almost 3 years – he is 22 & I am 24. Together we bring home 20k (give or take a few thousand, depending on the year). We’ve made our share of dumb choices, which I mostly blame on being naive when we got our first place together. On the positive side, though, we’ve never had a credit card, plan on paying off our car loan at least 4 months early (I hate loans), we’re planning our first out of the country trip together (to Berlin) and my husband’s new job allows me to work only a couple days a week & be able to focus on a business I just started. People always raise an eyebrow when I tell them that last part – yes, with us bringing home only 20k/year, I don’t need to work more than 2-3 days/week. My job would allow me to work a lot more if I wanted, but for right now I’m testing all this out. Our savings haven’t always been the greatest, but we’re working on that a lot more now. We live below our means, but we don’t torture ourselves or never treat ourselves to things. Right now I see people constantly complaining about the situations around them – yes it’s frustrating with everything that’s happening in the world, but if I end up in a hole it’s because one way or another I made choices that got me there. People always say, “but you don’t know what it’s like!” Hmm, obviously perspective comes into play, but if you’re complaining about not having something (like health insurance) & then throwing your money away on material possessions or entertainment purposes…I feel no pity for you. Don’t get me wrong, I’m not a know-it-all or immune to making mistakes, but my husband and I are thriving because we’ve taken responsibility for our lives & our actions. We may not live in the lap of luxury, but our lives seem to run much smoother & complain a lot less than people we know who bring home much more than us. What can I say, I can be a bit blunt – I’m not sorry, just sick of people pushing the blame on everyone/everything but themselves. But I do apologize for rambling on. This is just something I feel a bit passionate about :)

    • 41

      LadyLeo says

      I agree with you completely. Work with what you have and don’t live above your means. You can still have fun and do things on less money.

  17. 42


    $40,000 is probably ok for a young couple but I think that it’s hard with a family if you are covering insurance with that money, as well. If you are frugal and live wisely, it can always lead to stretching your dollars. My mother never made a lot of money but she sure knew how to manage it. I thank her for her example.

  18. 43


    I think you could if you didn’t have a mortgage payment. We’ve got two kids and between the mortgage, insurance and everything else, $40,000 just would lead us to have to borrow to make ends meet.

    • 44

      LadyLeo says

      If you make $40k you have to live in a house or an apartment that fits your budget. If you have to borrow money to make ends meet you are living in a place you can not afford.

  19. 45


    I have a 2-year-old son who we’re starting to teach money lessons. Obviously he doesn’t “get it” at 2, but when you ask him where the best place to go if you need money he answers “to work.” And if you say “work get money, don’t work…” he’ll finish the sentence “don’t get money.” It’s cute. I hope that doesn’t maker me a Tiger dad…

  20. 47

    Financial Samurai says

    Maybe your son is already getting action, which is why he feels he doesn’t have to spend money on her?!

    Something to think about..

  21. 50

    Little Tex says

    I attribute my success today to the financial education I got from my parents. Korean parents love the word “chamuh” which means “be patient” or “suck it up”. As a child I was given the Sunday paper and taught to clip coupons. When I wanted to buy a hair straightener as a teenager, I had to save up and wait until I combine a coupon with a mail-in rebate. I haven’t always been sensible but today I am debt free with growing investments. So if your son doesn’t get it now, keep at it, he will someday!

  22. 51

    LadyLeo says

    You can make it on $40k a year. I was 20 years old (single, no kids) making $20k a year later that went up to $25k. I bought a house worth $69k (granted in a low income neighborhood, 3 bedroom, 1 bath 1000 sqft. My mortgage was only $500 a month. My bring home was only around $700-$750 twice a month. With food,electricity, water, home phone and gas/insurance for my paid for car my expenses were around $1300 and still managed to put $150 a month in my Roth IRA. I worked a part-time job that paid weekly and brought home $165 a week after taxes that was automatically deposited in to my savings account (out of sight/out of mind). I used that money for emergencies/and to pay for most of my college expenses out of pocket. With this income, dedication and focus I graduated with a B.S. and less than $9k in student loans. You just have to stop blaming your situation as to why you can’t get ahead and work with what you have. (When life gives you lemons, make lemon-aid.


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