Spending Wisely to Build Wealth

Your income and ability to earn have a huge impact on your budget and what you can afford, but your spending habits and choices could have a bigger impact on your long-term wealth, according to Thomas Stanley, author of the bestselling Millionaire Next Door series. The amount of your income that you hold on to and can save or invest has the biggest impact on your net worth, so spending wisely on purchases big and small is a must.

Your Largest Asset

The rules of thumb for buying a home may be more than just guidelines. If you are like most Americans and relying on a mortgage to buy your dream house, your bank will impose some limitations on how much you can spend. For most traditional mortgages, your monthly home payment (including all fees, insurance and taxes) should be no more than 28% of your gross monthly income. This amount takes into account the expenses and obligations involved in owning a home.

Renters wishing to save money and curtail spending may not be required to adhere to that 28% maximum guideline, but spending above this amount each month could lead to trouble later. Your home is likely the biggest portion of your budget every month, so choosing wisely when you buy can help you save thousands of dollars a year.

Automobiles

That new car may sound affordable, but before you sign on the dotted line, make sure you truly understand the commitment. Even a used car loan can last a total of 5 years – and if your credit is damaged, you’ll pay a hefty interest rate to buy. The car you choose matters in more ways than one – choose a gas guzzler and your 30-minute daily commute will rapidly become one of your biggest expenses each month.

A good rule of thumb for judging what you can afford to spend on a car or vehicle is to allocate no more than 20% of your income to cars. This figure should include the vehicle itself, all taxes, insurance and maintenance costs. Make sure the car you buy not only matches your lifestyle today but your goals for the future – and that you’ll be able to afford to drive it.

Monthly Living Expenses

Cutting your expenses means you’ll have more money to save, invest and build wealth. Whether you are an avid couponer, thrift shopper or just prefer to avoid shopping entirely, buying less consumable items can improve your bottom line. No matter what your buying style is, if you avoid using credit cards or pay them off entirely, you will have more luck with saving money. If you charge $1,000 worth of “stuff” in 2015 and only pay the minimum amount due each month, it will take you a whopping 8 years and $1,500 to pay the bill in full. Paying more than your minimum required payment each month or avoiding credit cards entirely can help you save.

Your income truly matters, but the way you allocate that income each month will have a huge and long lasting impact on your bottom line. Controlling your spending by getting educated about the true total costs of items you purchase and setting a realistic budget can help you build wealth and improve your net worth.