What does it mean to live below your means?
There is a strategy called “living below your means” that is essential to building wealth and has been religiously used by everyone that is wealthy. Living below your means, in reality, is a very simple strategy in which one spends less than what they earn. Although this sounds like a simple rule of thumb it is surprising the number of people that fail to follow it, maybe from lack of education or disciple. At the core of this tactic is understanding that one can afford better, more expensive, and larger items but consciously choosing not to. Calculating monthly income and expenses to ensure that the amount of money going into your account is greater than what is leaving it will result in the accumulation of extra cash, but what is done with that extra money is crucial. The money that will be leftover can not be spent on luxury items that are nonessential, instead, it needs to be put into one of three places, paying off debt, put in a savings account, or invested.
What should I do with the extra cash?
After successfully living below your means you will be rewarded with spare cash that needs to be utilized. To build great wealth the extra money needs to be used first to build an emergency fund, second to pay off all bad debt, and third to invest.
An emergency fund is a savings account that is set up specifically for emergencies only such as job loss, car problems, health issues, etc. Calculate your monthly expenses and with the extra cash save around three to six months worth in this account and don’t touch it. Ideally, once this fund is set up you won’t have to use it, it can just serve as a safety net that provides financial comfort.
Although debt can sometimes be leveraged to your advantage, generally debt is any kind of money owed that you are paying interest on. This debt can negatively affect you in two ways by consistently draining your accounts while also crushing your optimism, and therefore it should be avoided at all costs. Unfortunately, many people have accumulated debt over their lifetime on unnecessary and luxury things such as credit card debt, car loans, mortgages, etc. Once you have established your emergency fund, your focus should shift to paying off debt as quickly as possible.
Investments can take up numerous forms such as real estate, bonds, certificates of deposits, stocks, options, etc. Investing is so crucial to building wealth because by investing your money intelligently, you will result in a profit. Also, typically speaking the more money you invest, the greater the profits that can be earned. After an emergency fund is created and debt is paid off, research which investment strategy fits your financial goals best and use all the extra cash to consistently invest as your wealth grows exponentially.