Recently I was talking to a coworker who is looking to get a new car. His lease on his BMW was ending soon and we was considering leasing a new 440i BMW. Nice car but the monthly lease payment he was looking at was close to $700!
I’ve worked with this guy for a long time and he talks to me about his financial struggles all the time and how he just can’t get ahead. His problem to me is simple. He always gets the latest gadgets and toys. From leasing a BMW, getting a fancy drone, to riding around on a One wheel he is always finding new and creative ways to spend and burn his hard earned money.
He makes well over $100K per year but he complains to me all the time that he just cant get any momentum going with saving or investing. In case you’re curious he doesn’t have any kids so he can’t use that as an excuse for his financial situation!
From my viewpoint there is one thing you absolutely must do to achieve financial freedom which I define as working because you want to not because you have to. And that one thing is this:
Live within your means!
Living within your means is so important and I have subscribed to this belief since I got my first paycheck. Just because you make more money doesn’t mean you should spend more money. You should put those dollars to work for you by saving and investing them in stock and real estate. Here are some helpful tips:
Avoid the Marginal Propensity to Consume
This is one of the most important ways to live within your means and build up assets. The marginal propensity to consume is just a fancy way of saying that the more money you make the more you spend. If you can break this cycle you will be ahead of most people. Get a raise at work or an unexpected bonus? Don’t go out and buy that new car. Instead invest it in a SP 500 mutual fund or save it. The tendency to spend relative to your income is a problem that keeps people from saving and leads them to have nothing to show for a lifetime of work.
In a recent survey 39% of US adults said they had $0 saved and 57% had less than $1000 saved.
Pay Off Your Credit Card Balance Each Month
Credit card debt is dangerous and should be avoided at all costs! According to a 2017 survey by NerdWallet US households that have credit card debt owe an average of $15,564 on their cards. Credit cards typically have high interest rates and can put a significant strain on your finances. So if you use a card make sure you pay off the balance each month. Also I’m old school and subscribe to the belief that if you can’t pay for something you don’t need it. Want that new TV – save the money and buy it outright. If you can’t pay for it you can’t afford it so keep saving and make the purchase when you have the cash!
It’s really hard to save money when all your extra cash is being used to make credit card payments. To add insult to injury you may not even own the stuff you are still paying off.
So pay with cash (debit card) and don’t make frivolous impulse purchases.
Don’t Try to Keep Up with the Joneses
“We buy things we don’t need with money we don’t have to impress people we don’t like.” This is a quote from the movie Fight Club that has always resonated with me. Your friends and neighbors might have fancier cars or the latest and greatest technology toys. But you never know how they paid for it. I drive a 2010 car and my wife drives a 2005 vehicle. But we would rather save and invest in real estate and stocks than drive around in a depreciating asset. Be the “millionaire next door”!
Know your Income and Expenses
In other words have a budget. You know what they say “what gets measured gets improved”. If you don’t know where you stand financially it will be virtually impossible to address and correct your weak points. You need to set goals for yourself. By tracking your expenses you might be surprised to see how much you spend each week on lunch or coffee. I bring my lunch to work every day to save the money and to ensure that I eat something healthy.
Cut Down the Junk Expenses
Cancel the memberships that you don’t use. Cut the cable. Renegotiate your gym membership and take a close look at your mobile phone plan to see if you can save some money.
Increase your Income
Living within your means is a two-sided equation. You should definitely be smart on the expense side but you should also looks for ways to maximize your income. Here are some tips to increase your income. As I mentioned I am a huge believer in rental income.
Hope this helps you on your journey to financial freedom. What are some of your most helpful tips?
1 Comment
Managing the family finances is very important and requires conscious effort from all members of the family . My husband and I have different spending habits but we see to it that we save enough money for monthly expenses and investments . We plan to save more money as preparation for early retirement .