Investors, as well as homeowners and renters, should live beneath their means to truly enjoy financial freedom. The problem is, many individuals and families do not, and they eventually find themselves in severe debt.
Have you ever heard of the saying "Keeping up with Jones' " ? It simply means that someone is constantly purchasing material things of equal or greater value than their neighbors, friends, or family. For example, if the neighbor across the street adds a 20 foot deck to their backyard, the individual trying to keep pace with his neighbor will add a 30 foot deck to his backyard. They are more concerned with how others perceive them financially than how financially able they are to purchase such expenditures. This kind of behavior in individuals can have catastrophic results to their bank account.
Unfortunately, I know too many people who are trying to keep up with the "Jones' " with dire consequences. These are good people with lovely families and good intentions but unfortunately "debt" could care less how nice they are. Some are losing their homes, while others are being forced to liquidate many of the adult toys they've accumulated like motorcycles, Quads, boats, trailers, etc... Many have credit cards that are maxed out and very little savings to live on. You see, "keeping up with the Jones'" is a very short lived lifestyle offering only temporary feelings of grandeur.
To avoid the pitfalls of living above your means, here are several rules you should follow:
1) You should have no less than 6 months of cash reserves (living expenses) in the bank for emergency situations like an illness or loss of employment.
2) 1/4 of your income should be used to build the fore mentioned cash reserve.
3) If you have a monthly mortgage payment, it should not be more than 1/3 of your monthly household income including any impounds attached to the mortgage.
4) With the exception of a home, you should use cash for purchases or if you use a credit card, you should pay it off in full each month. If you can't pay for things you want in full, then be patient and wait until you've saved enough cash to make the purchase.
5) Create a monthly expenditure spreadsheet. When you see what you're spending each month, you'll become more sensitive to your spending habits.
6) Invest in assets not liabilities. Assets will make you money while liabilities will cost you money.