Spending Less Than You Make
To stay above water financially, you have to spend less than you make. This simple point is the most important principle for constructing and living within a budget. You simply cannot meet financial goals if you don't live within your means.
Yet many Americans spend more than they make, and it often starts with just a few bad decisions. Here's an example. In the early 2000s, a financial advisor on television said that as long as interest rates on new cars stayed at 0 or 1 percent (which car companies were offering at that time), the best financial investment a person could make would be to buy a new car. In fact, the person suggested that you'd have to be crazy not to take advantage of this situation.
Hmm, suppose a person watching that program owned a five-year-old car that was completely paid off and ran fine; but hearing that financial advice, our car owner decided to go out and buy a new car. After all, the opportunity for financing this low might never come again. So, the car owner trades in the perfectly fine car and gets a great deal on a new car, but two months later, the car owner begins to feel the pinch.
Monthly car payments went from $0 to $318, and insurance costs went up $168 per year. Before, our car-buying friend always had a bit of extra money every month — enough to put $200 in savings and still have a little left over. But now, there's nothing to go into savings and no extra cash around. In fact, even in the first few months, the car owner is beginning to put a few groceries on the credit card just to get by. Before long, this one innocent purchase has led to a spiraling financial problem.
Most millionaires don't lead wild and exciting lives. They are ordinary folks who save a lot, are thrifty, and account for every penny. You, too, can amass a small fortune by renting DVDs instead of paying full price for movies, using coupons, skipping the daily Starbucks fix, turning down the thermostat, buying long-lasting clothing and shoes, and so on.
The car was definitely not the best investment our car owner could have made. A far better decision would have been not to even think about getting a new car until the old one had a problem. The drop in interest rates saved our car owner money, but the car itself — at that particular time — was something our friend didn't need or plan for.
Remember: A product is only a good deal if you've planned for it and can afford it within the context of your other financial goals. Nothing — not low interest rates, a sale on shoes, the house of your dreams — is ever a good deal if it requires you to spend more than you make.
