We all know that the best way to get out of debt or STAY out of debt is to “live within your means” or even better “below our means.” In an ideal world we would live below our means because we would be saving money. However, with the personal savings rate sitting below 1% of our disposable income, it doesn’t seem many people are saving anything out there. So, lets focus on at least living within our means. But what does this mean to us in real life, how do we get there? Here are a few tips to get us there:
Tip #1: Forget about the Joneses. Enough with trying to keep up or compete with your friends or neighbors. In reality you don’t really know their exact financial situation and they may be in as much (or probably more) financial trouble as yourself.
Tip # 2: Stay away from credit card debt. No more charging on a credit card. The problem with using credit cards is that we are consuming goods before we have earned the money to be able to purchase them. So I challenge you (and yes, I say challenge because it is a real challenge not to use credit cards nowadays) to pay for your purchases with money from your checking account. If you must use a card, use your DEBIT card. I think this is the real test to people who want to live within their means, live one month, ONE month solely on the money you have already earned.
Tip #3: Mind your credit. Record that is. The truth is that in this country you need credit in order to be able to have access to credit. Doesn’t make much sense right? Like I told my friend the other day: you need to carry credit cards what you don’t need is to carry a credit card balance. The cleaner your credit record is the more you save, yes! because when you need to borrow in the future again the lower your interest rates will be.
Tip #4: Enough with the impulse buys! We must learn to think before we buy. We have all walked around the mall and stop by the window where that cute widget is calling your name. But do you really need that widget? And if so, consider more importantly what am I giving up in order to get said widget? Will I be paying less on my credit cards minimums this month? or worse: will I be adding to my credit card debt with this purchase? We rarely ever consider the opportunity costs of our purchases. The truth is when we buy something we forgo doing something else with that money. Something perhaps more productive such as paying down debt, saving for retirement, or your kids college education.
Once we have learned to live within our means we can move on to living below our means: saving, investing and accumulating wealth.