A recent national survey has found that not only are many households feeling worried about their wealth, many people live from pay cheque to pay cheque.
ME’s latest Household Financial Comfort Report has revealed that Australian households are feeling overall worse about their net wealth, jobs, income and living expenses due to further residential property price falls over the past six months and a weakening labour market.
On top of that, the survey found that a staggering 40 per cent of households continued to spend all of their monthly income.
So, they burn through all of their cash every single month.
What is probably most interesting about that statistic is that I bet it’s not quarantined to low income earners.
In fact, I’ve met plenty of high-income earning professionals over the years who spend every single cent of the thousands of dollars they make every week because they don’t understand a few simple money principles.
1. Spend less than you earn
This seems like a no brainer, but it clearly remains a struggle for many people.
I wouldn’t be surprised if this figure was higher because plenty of people don’t consider spending on their credit cards when obviously they should.
You see… they thing the limit on the ir cerdit card is their money and it’s not. It’s the banks and they pay (interest) for the privilege of using it.
But they think nothing of buying new shoes or a new suit on their credit cards, because they pay the minimum repayment of the balance every month so it’s not really overspending is it?
Of course it is because they are using the bank’s money to buy things they clearly cannot afford out of their own salaries.
Then, once interest is added, the cost of those items will be far greater than their original price tags.
That’s why spending less than you earn is a fundamental money management strategy that must be learned if you want to create wealth.
2. Save and then invest
Those who have committed to improving their financial futures have mastered spending less than they earn.
They also have adopted a principle of paying themselves first.
Now, this isn’t allocating themselves large sums of money that they can spend on discretionary items.
Rather, this is regularly setting aside a percentage of their income in a different account as savings – not spendings – as soon as they are paid.
Now this is different to what most people do – because those who try and save what’s left after spending usually find there’s nothing left.
The money runs out before the month does.
On the other hand, those that pay themselves first are creating an instant savings regime, with a balance that will grow over time, because they never touch it.
After budgeting for expenses, they then simply spend what is left over in their transaction account each month.
If those funds run out, then they make do until they are next paid.
Over time, their savings grow and grow, which they then invest into assets, which will produce income as well as increase in value in the years ahead.
The thing is they never stop adhering to these two strategies.
Even when their assets have equity, which they can recycle into buying more assets, they continue to live within their means.
They keep doing this for however long it takes to grow a substantial asset base which eventually becomes their cash machine, which may allow them to stop working full-time or perhaps to retire early.
And as you know my preferred investment vehicle is income earning well located residential property.
The truth of the matter is…
If you don’t get these first two steps right, you’ll forever be on the hamster wheel of living from one month to the next.
And you’ll forever be wondering how some people got off the financial merry-go-round and you didn’t.
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