Most people don’t have enough money saved for a rainy day. It’s important to have enough money in the bank to be able to survive a major financial downturn like a job loss. You should also be saving for your retirement. Maybe you are worried about the state of your finances and wonder how you can get in control of them. The key to getting control of your money is to live on less than you have. Here’s how.
Putting Away Something in Savings
Building an emergency fund counts as the most important financial step you can take to ensure that you are living below your means. Most financial advisors suggest that you have between three and six months' of income stored in savings in case of an emergency. Most people don’t. The problem is that if they become unemployed, they’re forced to live on credit cards or loans from family because they have no money in savings. If you have to borrow money to live, you’ll eventually have to pay it back or go bankrupt. Putting money into savings each month ensures that you never have to go into debt should a major financial blow occur.
Not Investing Too Much
It's certainly true that real estate, starting with your home, can be a sound investment. That said, you should be careful about putting too much money into real estate because doing so can make you property rich but cash poor. While it’s nice to have property, you may not have enough money in the bank should you experience a job loss or serious illness. So how much can you safely invest in your home? Here’s a rule of thumb. The average American making $61,372, assuming they have no debts, should pay no more than $2,301.45 a month if they buy a house with a conventional 30-year mortgage. This means that you would have no more than 30% to 40% of your money sunk into real estate at any given time. Following this tip will keep you from paying too much on housing.
Living Below Your Means
Living below your means ensures that you always have more money coming in than going out. People who adopt this lifestyle often vow to forego buying something new until they can pay cash for it. If they do get a raise at work, they pretend to themselves that they are still bringing in the same amount of money each month, and the extra money from their raise goes into savings or an IRA. The less of your money you spend, the more of it you can keep.
Spending less cash than you earn takes effort. It’s really a lifestyle choice and not a one-time thing. To get started, you first want to put money into savings each month. Next, be mindful of how you invest your money. Being cash poor can hurt you if tragedy strikes. Finally, do your utmost to spend less money than you have. If you follow all of these steps, it’s unlikely that you’ll ever have to worry about your finances.
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