What separates those on their way to financial freedom from those who, let's just say, are on the totally wrong route?
The answer is simple - too simple actually. Those in one of the two groups live within their means.
C'mon. I must've heard of that a thousand times already. Can't you give me something new? A surefire way to get rich?
Unfortunately, no. You must have heard of the advice a thousand times, and the reason for that is that it works! Coupled with the practice of delayed gratification and having financial knowledge, the principle of living within your means is the surefire route to financial independence.
Why?
This is because it is only when you live within your means that you are able to do the following pre-requisites:
1. Save enough money to build an emergency fund.
2. Set aside enough money to invest in stocks, mutual funds, etc.
3. Develop a habit of tracking money and keeping a budget.
4. Learn the values of humility, contentment, and responsibility.
Otherwise, if you keep living above your means (beyond what you can afford), you will keep draining your income, depleting your so-called savings, and borrowing money. Then you'll have to borrow money to pay the money you borrowed from someone else. It's a vicious cycle!
Okay, now I know it's important. But what exactly does living within my means mean?
For me, "means" is simply the money you can afford to use for a transaction. For example, if you earn P35,000 a month, and you typically spend P10,000 for all necessities, you may have the means to buy a house that will cost you around P15,000 a month. (Not more than that because money should be set aside for savings and investments.)
In other words, you have the means to afford a house without borrowing and without touching your emergency fund.
On the other hand, if you keep finding yourself taking out your credit card to buy something you like on installment - because you can't afford to pay it in full cash - I'm sorry to break it to you. You're living beyond your means.
You are living within your means if you meet all of the following:
1. You don't have any bad debt. Bad debt refers to a credit done to purchase an item that depreciates in value i.e. bags and gadgets. Good credit, on the other hand, may include borrowing for real properties and businesses.
2. You are not living from paycheck to paycheck. If your next salary gets delayed even for a week or two, you won't panic.
3. You are not living in fear. If an emergency happens, you know you've got an emergency fund that will take care of you (as you haven't already withdrawn it to pay a debt).
4. Aside from the money you have in your emergency fund, you also have enough for investments. (Not all may be in this stage already, but if you keep changing your mentality and mindset, you will eventually reach this stage.)
5. You have successfully removed from your system the urge to keep up with the Joneses.
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Examine yourself. Did you find yourself agreeing with every item above? If so, let's give each other a virtual high five!
But if you kept shaking your head and realized that you're the one who keeps buying stuff and paying for them on installment, I have to be honest but living beyond your means will get you nowhere. And what for? To be updated? To earn your friends' envy?
Image: http://www.friedkristy.com
I'd rather you earn their respect and admiration by updating your mindset and not your wardrobe. If you want to learn the simple ways to begin living within your means, stay tuned for my Finance Friday post next week.
Have a great living-within-your-means weekend!
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