Spending less than you earn is the key to financial stability and wealth building. It allows you to get out of debt, save for retirement, and enjoy the freedom that comes with controlling your finances.
Get Out of Debt
You can pay off your bills. Getting rid of consumer debt is the most powerful step you can take toward financial freedom.
It’s powerful because its effects are cumulative. Every payment you make decreases the interest you owe. Smaller interest payments allow you to aggressively pay off the principal, and once the bulk of your salary isn’t going toward debt payments, you can start using it to build wealth.
Save for Retirement
Spending less than you earn allows you to save for retirement. Investing early gives your money longer to grow, and small amounts invested now can turn into huge account balances later.
Most financial experts recommend saving about fifteen percent of your income for retirement. While there are many ways to save, two of the most popular retirement investment vehicles are 401(k)s and Roth IRAs.
. 401(k)s are offered through your employer and funded with pre-tax dollars; you’ll pay taxes on the money when you withdraw it. Many employers will match a percentage of their employees’ 401(k) investments, so take advantage if your company offers this benefit.
. Roth IRAs are funded with after-tax dollars, but earnings and withdrawals are tax-free.
To withdraw money from retirement accounts without paying a penalty, you must be at least 59 1/2.
You can afford to travel when you spend less than you earn. Take the kids to an amusement park, go on a second honeymoon, or take a solo road trip across the country. Spending less than you earn allows you to do the fun things you once only dreamed about.
Start a vacation savings fund now, and you’ll be buying those plane tickets before you know it.
You can build wealth. To see the most return on your dollar, pay off your debt before you get serious about wealth building.
Once your debt is gone, all the money you put toward debt and interest payments can go toward investment opportunities. It’s smart to fund your retirement accounts first because of the tax breaks they provide, but after you’ve done your retirement investing, consider putting money into the stock market and real estate.
However, be careful about going back into debt to invest in real estate. It’s different than taking out a mortgage on your primary residence. A great deal on a rental property might not be such a great deal if you have to borrow money to buy it.
Give to Charity
You can help others. Food banks, homeless shelters, and children’s hospitals are a few of the places that could benefit from your financial generosity.
Not only will your generosity help others, but scientific research has found that giving is good for you too. A study published in the International Journal of Psychophysiology in 2006 found that providing social support to those in need has a positive effect on blood pressure.
In a similar study conducted by the National Institute of Health, researchers found that the pleasure centers of the brain were stimulated in people who donated a portion of a one hundred dollar bill to charity rather than keeping it all for themselves. It’s not your imagination; giving really does make you feel good.
Donating to charity provides you with financial benefits as well. Charitable giving is tax deductible, making it a great way to lower your tax bill.
Change Your Family’s Future
Spending less than you earn can change the course of your family for decades. It enables you to save for your kids’ college educations, allowing them to graduate without student loan debt. This will positively affect their families, and the benefits could last for generations.
According to an article published by the American Psychological Institution, money is a leading cause of stress. When you have more money coming in than going out, your stress levels drop. Lower stress levels benefit your health and relationships.
Spending less than you earn is the first and most important step to financial stability and building wealth. Once you start, you’ll experience a host of benefits that will lead to a healthier, happier life.