Money makes the world go round. And for the majority of working-class Americans, building wealth is a primary goal – or at least a desire. Unfortunately, most people have a totally backwards view on how to do it. It’s not nearly as flashy as it looks. In fact, the process is generally very understated and simplistic.
3 Ways to Live Within Your Means
Contrary to popular belief, you can’t determine someone’s wealth by looking at the possessions they have, the clothes they wear, or the neighborhood they live in. This is a debt-laden nation, which means virtually anyone can buy physical tokens of wealth without actually having the wealth needed to afford these items.
We live in a society where keeping up with the “Joneses” is a very real thing. People who don’t have money are surrounded by people who do – or at least people who have more – and this creates an “I want it too” mentality.
Millions of Americans have aspirational wealth. In other words, they want to be wealthy, so they attempt to buy their way to the top rather than work/earn/save/invest their way to the top of the economic food chain. And while it might fool a few people for a little while, this house of cards eventually falls.
Aspirational wealth is not real wealth. True wealth isn’t defined by how many expensive purchases you can finance. It’s defined by your balance sheet. Do your assets tower over your liabilities? Or do your liabilities stand so tall that they cast a cold shadow on your measly assets?
While it’s true that there are multiple ways of building true wealth, there’s really only one predictable and proven path – and it’s something anyone can do. (It doesn’t matter if you’re making $60,000 per year or $400,000.)
Are you ready for it?
The key to building wealth is to live within your means.
See – it’s not very sexy! But it works.
What does living within your means actually entail? It’s pretty simple, actually: live on less than you make. Spend a portion of what you earn and save/invest the rest. And don’t worry, there’s data to back this up.
According to the largest survey of millionaires ever conducted, 94 percent of wealthy people live on less than they make. Compare that with 55 percent of the general population who say the same thing.
So how do you do it?
Again, it’s not super complex. It does, however, require copious amounts of self-discipline.
If you want to build wealth by living within your means, there are three major things you can do to accelerate your results:
1. Avoid Bad Debt
Bad debt will suppress you more than anything. When you have massive debt payments each month, it puts a chokehold on your cash flow and prevents you from doing smart things like saving for retirements, investing in real estate, and buying things that your family really needs to be happy and healthy.
In addition to avoiding credit card debt, resist the temptation to finance the purchase of a brand new car. There’s a case to be made that you can become a millionaire on this principle alone. (By paying cash for pre-owned vehicles and investing what would have been your monthly payment into a good growth stock index fund.)
2. Don’t be House Poor
Green Residential defines house poor as “purchasing more house than you can afford, in such a way that it causes you to spend a disproportionate amount of your monthly income on mortgage payments and utility expenses, which places a strain on your budget and forces you to make unrealistic compromises in other areas of your life.”
That should tell you everything you need to know. If you buy too much house, it prevents you from accomplishing the other positive financial objectives needed to build wealth. Buy a nice house – but buy one you can afford. Save and invest the difference. It’s not sexy, but it works.
3. Save for Retirement From an Early Age
Compound interest is commonly referred to as the “eighth wonder of the world.” The sooner you start investing, the more your money can work for you. Consider how much money you’d have in your account by the age of 67 if you invested $500 per month starting at the following ages.
· Start saving at age 25: $1,055,703
· Start saving at age 30: $763,609
· Start saving at age 40: $382,235
And guess what? We’re using a measly 6 percent return as the basis. Most people will get a far better return over time. Something closer to 8 or 9 percent is realistic.
Don’t be a Phony – Be You!
There’s another aspect of living within your means that people don’t talk about nearly enough. It’s the fact that it frees you up to be you. Instead of practicing aspirational wealth – which is basically a way of being “pretend rich” – living within your means gives you the freedom to be genuine and happy. And at the end of the day, isn’t that the goal of true wealth?