What is The Key to Building Wealth?
A strategy called “living below your means” is the key to building wealth. This strategy has been religiously used by almost everyone that has generated great wealth. Living below your means, in reality, is a straightforward strategy in which you spend less than what you earn. This sounds like a simple rule of thumb. However, the percentage of people who fail to follow it is remarkably high. This likely is a result of people’s lack of financial education and self-control.
How do I Live Below my Means?
First, calculate your monthly income vs. expense. If you have spare cash at the end of the month, you successfully live below your means. However, if you are breaking even or even getting into debt at the end of the month, you fail to live below your means.
The goal is to consume intelligently and ensure that you are not spending your entire paycheck. Purchasing less expensive items, going out less, and limiting unnecessary spending can be great ways to cut back on your spending. Doing these things will ensure that the amount of money going into your account is larger than what is leaving it. The result will be a monthly accumulation of extra cash.
However, what you do next with that extra cash is crucial. The money must be put into one of three places, paying off debt, 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, you should manage the extra money in a specific order. First, build an emergency fund. Second, pay off all of your bad debt. Third, start investing.
An emergency fund is a savings account set up specifically for emergencies only. This would include events such as job loss, car problems, health issues, etc. With the extra cash earned from living below your means, you will be able to build this safety net. This emergency fund should contain around three to six months’ worth of expenses and should not be touched. Ideally, once this fund is set up, you won’t have to use it. It can just serve as a cushion that provides financial comfort.
Although you can sometimes leverage debt to your advantage, generally, debt is dangerous. Debt is any borrowed money that you are paying interest on. This debt can negatively affect your financial standing in many ways. Such as consistently draining your bank account and also crushing your optimism. Therefore, it is recommended that you avoid debt at all costs.
Unfortunately, many people have accumulated debt over their lifetime on credit cards, car loans, mortgages, etc. Once you have established your emergency fund, your focus should shift to paying off debt as quickly as possible. Use the spare money from living below your means to pay off your debt one by one.
Investments can take up numerous forms such as real estate, bonds, certificates of deposits, stock market, etc. Investing is a crucial aspect of building great wealth. This is because by investing your money intelligently, you can passively increase your net worth over time. After an emergency fund is created and your debt is paid off, research what investment strategy fits your financial goals best. Finally, use all the extra cash from living below your means to invest and watch as your wealth grows exponentially.