This article was published in the New Haven Register on December 8, 2018.
If you’re a young executive or professional, you may believe that achieving wealth and financial freedom is a complex goal. Managing money once you have become affluent can indeed be complicated, but the secret to building that wealth is actually quite simple.
No doubt you’ve heard this secret before, but are you putting it into practice? It may be simple, but that doesn’t mean it’s easy.
Here it is again: Live below your means. Especially early in your career, the secret to building wealth is to maintain as large a gap as possible between your income and your expenditures. When you spend less than you earn, the difference forms the foundation for investment planning, retirement planning and the accumulation of wealth, because that money goes toward savings and investment planning.
How do you live below your means? The first step is to realize that debt is enemy No. 1. If you live in a big house and drive a high-end vehicle while wasting money paying off debts, you have the wrong idea. That lifestyle eventually will catch up to you and prevent you from achieving real financial freedom.
True wealth is knowing that you can easily handle an unexpected expense without having to borrow against your future. Here are some ways to live below your means:
Live on 85 percent or less. Many financial advisers help their clients devise a budget that has them living on at least 15 percent less than their annual income. First get a clear handle on your income, and then create a budget that has you saving or investing at least 15 percent.
Pay yourself first. I have mentioned this strategy before, and it’s important enough to repeat again and again. It means make sure you take care of the saving and investing side of your budget first, so that you’re not tempted to over-spend. Set up automatic paycheck deductions that flow into your retirement plan and your savings account or other investment accounts.
Match expenses to your values. Write down the things that are most important to you. Is that morning latte at the drive-through on the list? If so, you may want to reevaluate your priorities. One of the easiest ways to cut spending is to stop paying for things that don’t really matter.
Scrutinize your bills. Look over your bills, and especially your credit card statements, with an eye toward reducing the amount you pay every month. This applies to both large and small bills. For instance, many people today are canceling expensive cable TV subscriptions and using lower-cost streaming services for entertainment. At the other end of the spectrum, make sure you are not paying for unused memberships, such as a few dollars a month for an online app you no longer use.
Make it gradual. Finally, if you are paying off debts and just can’t cut your expenses enough at present, set up a plan to increase your savings by a certain amount every month, or every three months. A financial planner can help you with this sort of long-term strategy to improve your financial health and get on the path toward financial freedom.