I’ve been out on the road doing a bunch of seminars at schools, workplaces, and churches. In the past few weeks, I’ve given the same seminar close to a dozen times and there are always certain phrases that raise eyebrows.
Recently, I was asked what does the phrase, “live within your means,” actually mean. One of the attendees stated, “that’s all good but it’s the same tired bull crap that every financial person says.” She’s absolutely right. We repeat these personal finance tips often but don’t really fully explain what they mean and how it applies in their life.
If your journey is to live better and retire well, then get to know these basic money phrases. Here is an explanation of the 5 common personal finance tips you’ve might have heard but hadn’t fully grasped.
Live within your means
As mentioned above, “live within your means” is spouted countless times and we nod our heads in acknowledgment. I’ve also heard the phrase negatively used by some to put others down. Such as “if they lived within their means, they wouldn’t be in debt.” To live within your means is living with the money you make and not overspending or relying on credit. Many people don’t know what their “means” are because they haven’t done the work to calculate their real income and expenses.
How do you live within your means? Perform a financial analysis of your income and your expenses with a budget. Then, calculate your cash flow to determine if you’re net flow positive or negative. You should be left with a positive amount indicating you’re within your “means.”
Ask yourself what is your gross pay? What is your net pay? How much money is spent on bills, debt, and discretionary expenses?
Pay yourself first
Paying yourself first is beneficial for your long-term financial success. It refocuses your efforts to saving money and keeps you motivated for the long haul. Financial wellness requires forward-thinking and paying yourself first makes you recognize that tomorrow is as real as today. Paying yourself first means saving money for future purchases. You are saving money for yourself. This is done by thinking of yourself as a bill and allocating money into a savings account each and every payday.
Pay yourself first every time you get paid. Have your paycheck direct deposited into your checking account and automatically transfer at least $50 into a savings account. If you don’t have an emergency fund, start with a rainy day fund, and then transfer money into that account. Find it hard to save money? Use automatic transfers offered by your primary banking institution or a savings app the offers round-ups and transfer to help you. Find the right savings app to help you in the marketplace.
Don’t get into debt
We all know debt isn’t a good thing. It’s quite frustrating to hear others say “don’t get into debt” when you are already in debt. In fact, we’re inundated with marketing messages about financing your dreams with credit. Credit is simply a tool, however, when it’s misused can turn into long-term debt. Debt reserves your future time to work rather than fun.
You can use credit as leverage to create wealth or help you move up the socio-economic ladder. For instance, using credit to buy rental properties or starting a business can be beneficial to upward mobility. On the other hand, debt obtained from credit card purchases for smartphones, clothes, or travel can lead you down a dark debt path.
Prioritize debt repayment. Pay off credit card debt first. You can look into credit card consolidation loans to help speed repayment. Consider consolidating student loan debt. Make extra payments towards your auto loans and consider additional payments to your mortgage. You may need to find ways to increase your income by getting a pay raise, earning money through side hustles, selling your stuff, or getting a part-time job.
Prioritize between needs and wants
Many experts share the importance of spending only on “needs” and disregarding your “wants.” Living your best life requires spending on wants too. We work to earn money to spend on things we need to live, but also on things that create joyful experiences. Spend your money on things you need AND want.
Needs are necessary expenses such as rent, food, and transportation. Wants are desires such as designer clothing or a luxury car. Start with knowing the basic elements of your life that are necessary and what are optional. Sometimes a luxury item can be a necessity but again that’s why finance is personal. You decide how and where to spend your money. You can prioritize when you know how your money is being spent.
It’s okay to spend money on both your needs and wants. Prioritize and allocate your limited financial resources to the things that matter most to you. Spend on your needs and create a plan to afford your wants.
Save early for retirement
Retirement is often described as the time when you get to live your life without having to spend your time at work. For most, retirement happens at old age, but a growing number of people are retiring much earlier. Everyone will retire at one point or another. Whether it’s by choice, by age, or ailment, or lottery win. The sooner you start thinking about retirement and what that looks like, you can start planning on how to retire sooner. This is a key premise for my bestselling book, You Only Live Once.
Here’s the lowdown on retirement: When you have enough money saved to cover your living expenses without the need to work, then you have the option to retire. Of course, you can work if you choose to, but working for money isn’t a requirement.
Start investing for retirement as soon as you start making money. The benefit of saving early is that your money today will be worth more in the future because of compounding interest. And your investments will benefit from compound growth with a longer investment timeline.
You might hear some financial experts tell you that $1 million in the future isn’t worth $1 million because of inflation and the increasing cost of living. I will tell you right now that $1 million in the future is still $1 million. So, yes, start saving and investing money for the future, right now!