Live Within Your Means (& Generate POSITIVE Cash Flow!) - Pt. 1
8/6/2012 2:21:59 PM
Money will never make you completely happy—but mismanaging it can be a life wrecker!
Money problems are among the top reasons for divorce, alcoholism, and suicide in our country. For these, and many other reasons, it’s critical to become a wise manager of your financial resources. You should consider this one of your greatest priorities and our nation’s educators should too.
Having a positive (and growing net worth) is essential for all of us, and the good news is it’s not rocket science. Simply put, it requires two things: 1) living within your means by spending less than you make and 2) building long-term wealth through a regular savings and investment program. This will set you up for success in both the short- and long-term.
In order to generate positive cash flow, you must spend less than you make. That means conservatively estimating your income and ensuring you have a “cushion” left over after all of your spending. Trouble sets in when you either overestimate your income or underestimate your spending.
Here’s where many run into trouble on the INCOME side:
- They forget that their take-home pay is roughly 60% of their gross salary (after taking into account deductions like federal and state income taxes and Social Security)
- They assume that a spike in their income is the new “normal” level of earnings and ratchet up their spending accordingly.
- They assume their strong investment returns in the recent past will persist.
It’s important to recognize whether your career provides a steady or volatile income. Generally speaking, the more your income is tied to sales (e.g., real estate agents) or project work (e.g., writers, architects, actors) the more it will fluctuate over time. This income pattern presents unique challenges in your financial planning because you can’t forecast the next few years based on the recent past.
Consequently, people often overestimate their future income when they just had a great year. Then, they increase their spending just when their income falls back to normal. Not good!
Don’t fall into this trap. Plan your income conservatively—it’s far better to be positively surprised than disappointed!
What are some ways you've learned to live within your means and generate a positive cash flow? Have you developed creative and effective ways of showing these principles to your own children or students? Share ideas and questions by commenting below; we'd love to hear from you!
Tagged as: LifeSmart, What I Wish I Knew at 18, financial security, cash flow, living within your means, budgeting, saving, investing, stewardship, income