Think it’s a pipe dream, putting half of your after-tax income toward investments?
Then you’re not thinking hard enough.
Investing in real estate costs money. The more money you can put aside to invest, the more you can potentially earn in returns. And ultimately, that’s the goal: creating financial freedom by making more money.
So if it takes money to make money in real estate investing, how can you set aside more money for your investments? Here are six tips to start living on 50% of your after-tax income.
6 Tips to Live on Half Your Income (& Invest the Rest!)
1. Your monthly budget must be based on four weeks’ pay, not your annual pay divided by 12.
Budgets don’t live on paper. They live or die in the real world, based on actual dollars coming in and going out.
In the real world, you get paid four weeks’ worth of paychecks in most months, and occasionally you receive six weeks’ worth of pay in a month (assuming you’re paid biweekly). Your budget needs to be based on what you can consistently expect to earn, not based on a theoretical fraction that exists only on paper.
On months when you do receive that third paycheck, congratulations! You can shunt that entire paycheck into your savings account. (What, you thought I’d tell you to go buy another trendy gadget or a 15th pair of shoes to almost-never wear?)
2. Start with your after-tax, after-savings income.
Most people start their budget by looking at their current monthly income and writing out their expenses. Don’t do that.
Practically speaking, investing half your income means living on one biweekly paycheck per month — two weeks’ worth of pay.
I can see you sitting there shaking your head and thinking, “There’s no way.” But if you got fired tomorrow, spent the next nine months unemployed, and eventually took a job making half the income you are now, would you figure out how to survive? You would, of course, but probably not without making some serious spending adjustments.
Now that you have an income to start from, list out your fixed monthly expenses: mortgage/rent, car payment, etc. Then list out your recurring but variable monthly expenses: utilities, groceries, gas for your car, etc. Finally, list out all annual or semi-annual expenses, both fixed and variable: insurance, accounting, gifts bought for others (Christmas gifts, birthday gifts, wedding gifts), and so on.
You’re undoubtedly deep, deep in the red by now, and you probably haven’t even accounted for discretionary spending yet. That’s OK. We’ll help you trim the fat.
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